Recent rises in new car sales have been fuelled by drivers using finance to buy the car of their dreams. But with so many different types of finance, many motorists are unsure which is best for their needs, and which will prove the most affordable. If you’re one of the majority of car buyers that’s happy to pay a monthly sum for their motoring rather than owning a car outright, it pays to do your homework and compare products, just as you would compare cars. Here we look at the main ways of financing a new car through the pros and cons of each.
On the face of it, smashing the piggy bank and buying a car outright using your savings is the most hassle-free way of replacing your motor. There are no monthly payments to worry about and no interest at what might be an exorbitant rate. And when you come to sell it, there are no concerns about penalties for exceeding mileage allowances or repairs to damaged body panels. However, you are tying your savings up when they might come in handy for something else. And be aware that the car will fall in value over time.
Using a loan
This is not dissimilar to using cash. You, rather than a finance company, own the car. And you’re still putting money into something that is depreciating. You should make sure that the loan isn’t secured against your home. If you have to default on your car payments, you don’t want the loan provider making you homeless. But with a loan you can finance as much or as little of the car as you want. There are also plenty of loan providers out there so you could end up paying a very competitive interest rate.
With hire purchase you put down a relatively low deposit then pay monthly instalments for the duration of the loan. The vehicle belongs to whoever you have the loan with until the last payment has been made. What’s more, until you’ve paid at least a third of the loan amount, the lender can repossess the car without a court order. But at the end of the hire purchase term you will own the car. The beauty of hire purchase is that it’s very flexible. Once you’ve paid half the cost of the car you may be able to return it and walk away from the deal. That’s ideal if your circumstances change. You can also get competitive interest rates as long as you have a good credit history. And after you’ve paid the deposit, you only have the monthly payments to worry about with no ‘balloon payment’ at the end.
Personal Contract Hire (PCH)
This is leasing by another name. It means you don’t own the car, you’re essentially renting it for an agreed period. There are many benefits to this for the savvy buyer. Monthly lease repayments tend to be lower than a loan on the equivalent car. This is because what you pay is what the car costs new minus what it will be worth at the end of the loan term. It means cars that hold their value better cost less money to lease than rivals that lose money quickly. PCH also has a relatively low deposit compared to other forms of financing. However, you don’t ‑ and never will ‑ own the car, which might trouble some drivers. And your repayments are calculated according to the mileage you cover. Exceed this and you could end up paying a penalty at the end of the term.
Personal Contact Purchase (PCP)
This is similar to PCH but you have the option of buying the vehicle at the end of the term. You could still be penalised if you exceed the agreed mileage or damage the car as these help to determine your monthly payments. What’s more, the finance company still owns the car until you’ve paid the balance off.
However, the PCP is very flexible. Frequently, dealers will throw in service and maintenance packages so a single monthly payment will cover your motoring costs. And the big bonus is you’re likely to be able to afford a more expensive car than you could via a loan or HP. That said, if you’re looking at owning the car at the end of the term, a loan or HP might be better. That’s because you won’t have to find a large sum to cover the balloon payment at the end. And if you never want to own the car, a PCH with its lower monthly payments, could be the wiser choice.