The following is a guest article by Michael Challiner. Michael is a journalist specialising in Personal Finance topics.
Usually the cheapest way to finance the purchase of your car is with a personal loan. But there are other methods. This article explains.
Research The Car But Also The Finance Options
Most car buyers spend hours researching the makes and models of car before deciding which to buy. Then four out of ten rush out to the showroom and sign up for the car within 30 minutes of stepping inside.
But will their painstaking research extend to sourcing the cheapest finance package? Probably not. While around 50% of new cars bought privately are purchased on finance, nearly 20% sign up in the showroom for the finance deal offered by the manufacturer.
Unfortunately that could turn out to be a costly decision. With typical manufacturers finance costing 13.7% per year over a 3 year and including a 10% deposit, they could be throwing some £1,800 down the drain.
- Take someone buying a new Renault Megane Sport Saloon Privilege 1.6 and let's assume that it costs £16,000 on the road
- Including 3 years interest that means the full cost will be £17,384, however, there is a much cheaper option
- With a good credit history you could get a personal loan at only 5.5% and end paying just £15,631 - that's a full saving of £1,753
- Rushing to accept the dealers finance package can hit your pocket hard – it's effectively giving back the discount we hope you negotiated!
OK, I can hear talking about the special finance offers that manufacturers are forever advertising. Yes, there are some good deals - but always look closely. Some deals only relate to specific models with a set specification, often the cars the manufacturers are having trouble shifting. And beware because some deals have a sting in their tail. Take Volkswagens' current offer on the Polo E2 -
- The deal is advertised at 5.8% with a monthly repayment of £99 over 35 months - sounds a great deal
- But look more closely and you'll find there's a final balloon payment of £3,750, alternatively you can trade in your E2 for another Volkswagen
- The car manufacturers use these deals to promote brand loyalty and encourage another purchase in 3 years
- They know that most cars will be traded in after 3 years rather than pay the large balloon payment
Other Financing Options
Of course, personal loans and manufacturer's finance are not the only way you could finance your car.
HP Agreements
The traditional way to pay for your car is through hire purchase. With HP you pay a deposit, usually of at least 10%, or trade in your existing car for at least the same value, and then use HP for the balance of the price. The loan is then effectively secured on your car. So in practice, your car still belongs to the HP company until you have made your last monthly payment.
Then if you want to sell your car before you've completed the HP agreement, there will almost always be an early redemption penalty - often up to three months interest. The HP company will also register its financial interest in your car with HPI the finance tracking agency. This effectively means that you will be unable to sell your car until you have paid off the HP loan.
Personal Contract Purchase (PCP)
Another alternative is Personal Contract Purchase, PCP for short, and in recent years PCP has become popular.
- With PCP you agree the mileage you expect your car to clock up each year
- You then pay a deposit and part of the purchase price is deferred until the end of the agreed payback period
- Your monthly repayments then repay the balance and the interest
- These schemes are flexible as you can select the length of the loan and the size of the deposit but you'll find that interest rates vary between lenders
- The current average is about 12.8% - still well above the 5.5% rate for a cheap personal loan
- At the end of the PCP contract you'll have three options: -
- Pay off the deferred balance and keep the car
- Trade in the car using the trade in value to help pay off the deferred sum and hopefully leaving a balance towards a new car
- Hand in the car and walk away with nothing more to pay
This last option is always subject to your cars' condition reflecting normal wear and tear and its mileage is in line with the annual mileage you agreed when you bought it. If the recorded mileage exceeds the forecast mileage, then you'll have an excess mileage charge to pay. The cost per excess mile will always be specified in the PCP agreement.
One of the big advantages of PCP is the guaranteed buy back option effectively protects customers against excessive depreciation of their car.
As you would expect, car dealers take a commission for selling PCP contracts and to encourage you, you may find they'll agree a bigger discount on your car if you take their PCP deal. If your lucky, they may even throw in a low cost servicing package or low cost insurance. But take care. You'll need to do some homework to ensure that these extra goodies are worth the extra interest charged on the PCP contract.
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