How to pay for your car

Car Finance

Car Finance

If you are considering buying a new or used car, you don’t need to be told about the huge variety on offer. City cars, SUVs, saloons, hatches and crossovers all vie for your attention and your hard-earned cash. Now you also have a choice of the traditional fuels of petrol or diesel or the newer power systems like electric cars, hybrids or fuel-cells. It is a vast market and most buyers will spend some considerable time evaluating many different options before making their choice. Sadly, having done so, far too few drivers spend a similar amount of effort in deciding how to finance their car. This can mean spending too much money, negating any good deal that was negotiated on the car. Looking at the main types of car finance on offer can help decide which type of finance produces the best deal.

Cold, hard cash

If you have sufficient funds, simply putting down a pile of notes (or more likely a debit card) has many advantages. You will be paying absolutely no interest on your car, and you will own the vehicle outright from the first day. There are no credit checks or agreements to worry about. Should you decide to part company with the car, the proceeds from the sale are yours. You are completely free to decide to sell the car whenever you want, and there are no restrictions at all on your car. This may all sound perfect, and for some it is, but there are some things to consider before parting with all of that cash. Firstly, you need to make sure that you are not over-committing, especially on larger purchases. If you leave yourself short of cash you could become exposed financially and be forced to sell the car at a considerable loss. Next, you need to decide if your money can work harder for you elsewhere. If your dealer is offering you a zero percent or low interest deal on your new car and your cash is happily making a bundle of interest elsewhere, paying in cash is costing you extra money.

Hire Purchase

This is a very well-known way of paying for a car and something many of us are comfortable with. Here, you will pay a deposit and then pay off the balance of the purchase price with monthly instalments. The loan is secured against your car, which can make the terms more competitive than an unsecured loan. There are a few things you need to check and be aware of. A major consideration is the interest rate or APR. This is how much borrowing the money is going to cost you. Make sure that you understand the amount of interest you are paying and that you are happy with that. Always ask for the APR of the deal and the total amount payable on the deal. Compare this with the cash price of the car to see how much you are paying and make sure that total price includes any administrative or one-off charges. You should also consider the terms of the agreement. You are committing to having the car for this period and any cancellation could incur penalties. You do not own the car until the final payment is made, and if you sell you will have to pay off the finance company in full.

Personal Contract Hire (PCH) and Personal Contract Purchase (PCP)

PCP and PCH deals have become very popular of late. This is largely due to the big car makers having large amounts of inventory that they need to shift and consumers finding it harder to get loans on the High Street. A PCH deal is simply a form of leasing. Many deals will see you making a larger initial payment, perhaps equal to three monthly instalments, and then a period of monthly payments spread over a few years. The key attraction here is that those payments only have to cover the depreciation of the vehicle over the duration of the agreement, making them sometimes cheaper than a car loan. It is important to realise, though, that PCH is a form of rental. You do not actually own the car. This means that you cannot modify the car in any way without permission from the finance company. There may also be financial penalties if you exceed a certain annual mileage. If your circumstances change and you find yourself doing lots of commuting, this could make your PCH deal very expensive. At the end of the agreement term, you can simply hand the car back or, in some cases, you may be offered a deal to buy the car by making a final ‘balloon’ payment. This option is not usually guaranteed in a PCH deal, and if you want to make sure that you have the option to buy the car, you should choose a PCP deal. This is identical except for that right to buy at the end of the term. The PCP and PCH deals can keep your monthly outgoings down, and they are predictable costs, except where excess mileage is incurred.

Credit cards

This is not as crazy as it might sound. If you have sufficient credit and a low or even zero percent interest period, buying a car on a credit card can be cost-effective and efficient. You will not have to undergo any credit checks or sign up to any agreements as your credit is already in place with the card company. You will also benefit from some additional protection offered to credit card customers. There are, however, a few considerations to bear in mind. If you haven’t paid off the car by the time that your interest free or low interest period runs out, your costs could well rocket, and using your credit card could prove to be an extremely expensive way to borrow money to finance your car. You will also be tying up a significant amount of your credit, meaning that it is unavailable for other uses.

Dealer finance

Dealer finance usually takes the form of a car loan or hire purchase agreement. Conditions are the same as those mentioned above, but be especially careful of the conditions. Remember that the car dealer will most likely be motivated to sell you the finance package they offer. They are not shopping around for the best deal and they are not considering how the finance suits your circumstances. That is your job and before accepting any dealer finance you need to be sure it is competitive and right for you. Don’t be seduced by your enthusiasm for your chosen car. It can easily be bought with other, potentially cheaper and more suitable, finance packages.

Using a car finance broker

Thankfully, there are car finance brokers online where you can type in your details and get a choice of finance packages. This gives you an objective comparison and allows you to make a judgement on what’s best for you in the comfort of your own home, free of any pressure. Getting your finance sorted out before you visit the dealers will put you in the driving seat for any negotiations and ensure you get the best deal possible. It will also save you hours or even days of time, traipsing around the High Street or calling up providers.