Obviously, we’d all like to be able to buy a new car for cash. It is usually the cheapest way to buy, but even if you have enough money in the bank to buy a new Range Rover, don’t entirely ignore finance. From time to time car dealers are able to offer finance deals where you either pay no interest for one to three years or you pay half the cost of the car now and the other half at some time in the future.
If you have the cash, this is like giving you free money because even half the price of a cheap new car sitting in a high interest account somewhere can raise a substantial return – maybe enough to pay for a service.
There are five main ways of paying for a car:
- personal loan
- hire purchase (HP)
- personal contract purchase (PCP)
If you are paying cash, or a deposit on a car bought on finance, check what form of payment is acceptable to the dealer. If you pay by cheque they are unlikely to part with the car until the cheque has cleared. Banknotes will probably be acceptable for a few thousand pounds, but mean you will have to travel to the dealership carrying a substantial amount of money.
A bankers’ draft is usually acceptable, though for a substantial amount they may only accept one if they can check its validity with your bank. Some dealerships will accept a debit card payment, at least for deposits, but check whether your card has a limit and ensure the money is cleared if you have paid it in from somewhere else.
Few, if any, car dealers accept credit card payment for a car because of the amount the card company charges them.
There are an amazing number of firms you can get a personal loan from, ranging from high street banks to supermarkets, so shop around for the lowest interest. The best deals should rival HP (see below) and have the advantage that the car is yours from the beginning.
Naturally, the lender can chase bad debtors through the courts, but they can’t repossess the car. More importantly, if you want to sell the car before the loan is paid up, you can, which gives you greater flexibility in case your circumstances change.
#3. Hire Purchase (HP)
HP is the easiest to understand. As the name suggests you are effectively hiring the car while you buy it and, even though it will be registered in your name, it belongs to the finance company until you have paid the debt. This makes it easier to get the loan because it is secured against the car; so if you don’t pay up they can come and take it back.
However, if you want to sell the car before the loan is finished, the finance company will want to be paid off first and will probably still want the interest they were owed. They also usually want a bigger deposit than with other loans and monthly payments are higher than for a PCP (see below). Zero interest finance is usually HP.
#4. Personal Contract Purchase (PCP)
The PCP is the newest form of car finance. Like HP, the car remains the finance company’s until the loan is paid so there are the same pros and cons. The way it works is you pay a deposit, then monthly payments and at the end of the loan there is a lump sum final payment, which may be called the minimum future value or balloon payment.
The great thing about it is that it brings lower monthly payments than a loan or HP, bringing a new or nearly new car more easily into reach. The lump sum may not sound so clever but you only have to find it if you want to buy the car outright, which means you tie less capital up in it.
A PCP gives you three choices at the end of the term:
- Just give the car back.
- Buy it outright.
- Trade it in for another.
The final payment is set at a level the finance company thinks will be less than the value of the car; so the only time it would pay to just give it back is if the company got it very wrong. Buying the car outright means finding the lump sum, and over the whole term this usually makes PCPs more expensive than HP, though if you can get a good deal selling the car privately it may be worthwhile.
Most people want to trade-in and then the car will be valued in the normal way and any difference between its trade-in value and the final sum becomes at least part of your deposit on the new car. So, if the final sum is £3,000 and the car is worth £5,000, the dealer will send £3,000 to the finance company, so he knows the loan is paid off, and put £2,000 against your new car.
One criticism of PCPs when they first started was that they would tie you in to one car make, but that is no longer so. Most car franchises offer them now, as do some banks, so they are all used to paying each other’s final sums.
One thing to avoid when negotiating a PCP is reducing monthly payments by increasing the final sum. This eats into the difference between the sum and the car’s value, reducing the money you have as a deposit on the next car.
PCPs can also include service costs and even tires, though check carefully that it is worth it: there is no point paying extra for tire cover if your mileage is so low you are unlikely to need to replace them during the loan term.
Self-employed people registered for VAT may find leasing a car is a viable option because they can claim back the VAT on the lease payments and, usually, offset the rest against Income Tax. However, that depends on your circumstances and should be discussed with your financial advisor and car-leasing specialists.
Read more about Best Affordable Cars for College Students.