I’ll be honest, my car could be in better shape. While it still gets me safely from A to B, I know that the time to get a shiny new car is fast approaching.
In the past, I’ve always just gone ahead and bought my car outright – even though it’s meant having a much-used older model. As a result, I’ve never had to worry about making monthly payments (and have always had somewhere to play old CDs and, at times, cassette tapes). However, I’ve now reached a stage of life where I actually want the comfort, convenience and reliability of a modern car that I can be proud of driving.
The thing is, investing in a new vehicle can be a pricey business and, as a mere mortal, I can’t exactly afford to stump up thousands of pounds for a modern motor. So, what are my options?
The first thing to understand is the two options for financing a car; general borrowing and specialist car plans. I had always kind of assumed that people always get their finance plan straight from the dealership, but this is not the only option (and it rarely seems to offer the best deal). It’s always best to compare the total cost of payments (plus interest – look for a low APR) as well as any upfront discounts for various lender offers.
What I’ve dubbed ‘general borrowing’ means using a normal personal loan or putting the car payment on your credit card. It seems that these can usually work out as cheaper than a specialist plan, especially if you have a good enough credit score to get the best loan rates. With general borrowing like this, you can own your car outright and won’t necessarily need to pay a lump-sum deposit.
Specialist car plans fall under ‘hire purchase’, ‘personal contract purchase (PCP), or personal leasing. You can find these from various lenders, including car dealerships themselves, and will still usually need a deposit or a decent vehicle to part-exchange. Something to keep in mind with these schemes; you won’t actually own the car you’re driving, at least initially.
What are the ‘general borrowing’ options?
- Personal Loan
Personal loans are one way of purchasing a car outright if you don’t have enough in your savings. In order to get the best interest rates, you will probably need a good credit rating already, but you’ll also have the option to control how long you have to repay the loan. Plus, you won’t need to pay a deposit unless you want to.
- Credit Cards
If you have a credit card that offers 0% interest on new purchases (and pay the balance before that deal ends), it might be the cheapest way to stagger the payments to buy an expensive car outright. Of course, the amount you can borrow will depend on your credit history and probably won’t stack up to a really nice car (at least, it won’t for me), but credit cards can potentially prevent you from paying any interest on your car at all.
An added benefit of using credit cards – you can vary the payments each month. So, if you know you’ve got a big bonus coming up or will be coming into a bit of extra money, you can put it straight into paying off the loan without being penalised.
What do the different specialist car finance plans mean?
- Personal Leasing
Leasing a car means paying a fixed monthly cost to use a car, including proper servicing and maintenance. Paying 3 months up front is standard practice, as is facing extra charges if you exceed the agreed mileage or return the car with damage. With a lease, you don’t own the car and will have to return or exchange the car at the end of the contract, although it typically offers the lowest monthly payments.
- Hire Purchase
A hire purchase will involve putting down a 10% deposit then spreading the rest of the cost over 1-5 years in fixed payments until the total balance (plus interest) is paid off. The loan to cover the cost of the car is secured against the car itself, so if you fall behind on payments your lender can take it away. However, once everything is paid off, the car is yours.
The interest rates on this type of loan can be quite high, so it’s important to check the rate (and calculate what your overall cost will be) before you sign up. If you can afford the 10% deposit but don’t have a high enough credit score to take out a loan with better interest, this might be your best option.
- Personal Contract Purchase (PCP)
With a PCP plan, you’ll still need a 10% deposit but will typically have much smaller monthly payments as you’re not actually paying the total cost of the vehicle. Instead, you’re paying for the depreciation between the car’s sale price and the price to sell the car back to the dealer at the end of the contract (less the deposit you pay and the value of any trade-in).
PCP schemes usually run for 1-3 years and when the contract ends you have the option of returning the car, paying a lump sum to keep the car or trading it in to start a new PCP with a different car. Because of this, you’ll need to keep the car in a good condition and stay within agreed mileage.
If you keep the car, you might find that the total amount you pay is higher than it would have been if you’d bought the car on hire purchase or personal loan, which is worth factoring in before you sign up. However, it’s another option if you can’t get a good deal on ‘general borrowing’.