Buying a car outright is generally the best way to secure the lowest price, but there’s no denying that the proliferation of car finance schemes in recent years has opened up new car ownership to many more buyers. That’s because the often small deposits and low monthly prices make it possible to buy or lease a new car for the price of a used one.
In this guide we explain the different types of finance available, from bank loan through to PCP and everything in between. As always, we urge you to never borrow more than you can afford to pay back, and look beyond the monthly figures to consider deposits and interest rates as well, because it is only then that you can judge the true cost of a car.
If you have no intention of ever buying the car, but simply want a low monthly price, the latest technology and the feelgood factor and lack of worry that comes with a new car then a simple personal lease deal (also known as Personal Contract Hire or PCH) could be for you.
Monthly costs are generally low, as are deposits, which are often the equivalent of three or six monthly payments in advance. You will though need to stick to an agreed mileage limit and pay for servicing or any damage you cause to the car.
A hire purchase scheme is like lease only you get to keep the car at the end of it. As such, monthly costs are much higher but there’s no mileage limit or balloon payment to worry about.
You’ll often pay a higher deposit than you would on a straight lease, and it won’t actually be your car until you’ve paid any pre-agreed closure or transfer fees at the end of the contract.
Personal Contract Purchase
PCP finance deals have been hugely popular in recent years, in part because they offer more flexibility than either car leasing or hire purchase.
The scheme is based on the seller agreeing a Guaranteed Future Value (GFV) for your car, which is the amount the car will be worth at the end of the contract and means that as a customer there are mileage limits to adhere to. Your monthly cost is then based on paying off the depreciation between the car’s price when new and its GFV.
What makes a PCP so flexible is that at the end of the contract you can either walk away with nothing else to pay, pay the GFV (known as the balloon payment) and keep the car, or roll over into another PCP on a new car.
In the case of rolling into a new PCP, a dealer might decide to top up the GFV to give you a healthier deposit to put into another car. You might also find a dealer will offer to swap you into a newer model before your current PCP contract comes to an end, making PCPs good for those who like to drive the latest cars.
As far as a dealer is concerned, somebody who has taken out a bank loan is as good as a cash buyer. That’s good news for you as far as negotiating a deal is concerned, plus it means you’ll have the car as an asset, so you can always sell it on again without seeking permission from any finance lenders, and don’t need to stick to any mileage limits.
Interest rates do of course vary, so make sure you understand the full cost of the bank loan rather than simply the amount you are borrowing. Also bear in mind that car dealers might reserve some special offers exclusively for those buying through their own finance schemes, and if you fail to pay back your bank loan it is more than just your car you put at risk.
If you are disorganised with your finances don’t even consider using a credit card to buy a car, because the long-term financial consequences of failing to transfer balances to new cards once promotional offers have expired could be disastrous.
Some sellers will also charge a fee if you pay on credit card. However, if you’re efficient with your personal finances, have a good credit history and are prepared to put in the effort of finding the best promotional deals, using a credit card could potentially be cheaper than other types of finance.
Click on the images below to see questions and answers relating to different types of car: