Unless you are in the enviable position of having savings or other sources of personal funds to draw upon, the chances are that buying a car is likely to involve some form of finance.
In that case, the operative words are likely to be some form of finance – since there are many different forms from which you might pick and choose. Especially over the longer-term, some might be more appropriate to your particular needs and circumstance, whilst some types of finance may prove to be more cost-effective than others.
Selecting one kind of car finance over another may be confusing – a confusion which might lead to expensive mistakes. To avoid those mistakes, you might therefore want to draw on the experience and expertise of an independent, specialist car finance broker.
In the meantime, it might be helpful to review some of the finance options you may encounter when buying a car.
This is perhaps one of the most traditional ways of making any kind of major purchase on credit.
It involves the payment of an initial deposit (typically around 10% of the purchase price), followed by regular monthly instalments of a fixed amount, until a final payment is made to complete the purchase.
There are two important points to remember about this form of car finance:
- ownership of the vehicle is not transferred to you until the final payment is made, so that you may not sell the car without the hire purchase company’s permission; and
- the credit agreement is made with the car itself as security – in the event of your defaulting on the payments, it may be repossessed. A repossession can damage your credit and can hinder you from future car buying purchases.
Another traditional way of financing the purchase of a car is take out a personal loan from your bank or other lender.
You might again need evidence of having put down a deposit of your own, but the loan – which is typically unsecured – allows you immediate, outright ownership of the vehicle.
You should note, however, that with bank loans you may not get the most cost-effective interest rate as your bank may only be able to offer you their own loan product.
Using a car finance broker on the other hand, means you can typically have access to more loan providers, so you may get a loan at a more cost-attractive interest rate.
Personal contract purchase (PCP)
Although hire purchase agreements and personal loans account for around a quarter of car purchases, alternative methods are gaining ground which rely on the initial lease of the vehicle and a deferred decision about whether or not to buy it. During that period, the leasing company typically agrees to service and maintain the vehicle.
Without the need for any form of deposit, the car is leased – typically for a period of up to three years. Monthly instalments are therefore kept low because the cost of the lease reflects the initial value of the vehicle, less its agreed “residual value” upon termination of the lease.
At that stage, you have one of two options:
- to pay a final “balloon payment” representing the residual value that was agreed at the beginning of the contract; or
- simply hand back the car to the leasing company, with no further payments necessary and the freedom to seek a new personal contract purchase agreement.
This latter option, of course, is a means to ensuring that you are always able to drive a new car – or three years old at the most – before signing up to a new contract.