More than one way to finance a Car purchase
Most people spend a lot of time trying to decide what make and model of car they are going to buy, and then 40 buy a car within half an hour of entering the showroom. It seems that people spend a lot more time planning, and then jump in feet first. And do they spend as much time working out how to best finance their new purchase? We don’t think that’s the case. Approximately half of all cars bought through private means are purchased using a personal loan, but 20 of customers buying new cars from the showroom sign up to the manufacturer’s finance scheme offered to them at the point of sale. On average, the interest rate on a manufacturer’s scheme is 13.7, add to that a 10 deposit and payments over three years and that’s £1800 more than you needed to spend. As an example, take the new Renault Megane 1.6, let’s say that it’s on the road cost is £16,000. With the average manufacturer’s finance deal and the deposit, that would end up costing £17,384 over three years. Compare that to the personal loan at 5.5, which over three years will cost just £15,631 – saving you £1,753. This example proves that it is not a good idea to accept the manufacturer’s deal without having checked out all the other options. It wouldn’t be fair to say that all manufacturers’ deals are costly – they do offer some real gems occasionally. But you have to be careful. The model that they are referring to in the advert may not be the model that you want to buy. A lot of the deals are only referring to one particular type, and it’s usually the ones that they’re having trouble selling. You also need to make sure you read the small print, a deal that is currently available with the Volkswagen Polo E2 has a nasty surprise at the end. Paying just 5.8 on interest and a monthly payment of £99 over 35 months, you are faced with a final payment of £3,750 to pay off the whole amount. Otherwise you’ll have to trade in your E2 for a new VW, and be tied in for another three years, and so on. The manufacturer’s deals are designed to maintain your loyalty for the brand – experience has shown that most customers would rather trade in and get another car with them rather than pay out a large chunk at the end. There’s another way, other than with a personal loan or a manufacturer’s scheme, to pay for a car – that’s with hire purchase.This is the way it always used to be done – and it involves paying a deposit of probably 10 at the beginning, and then making monthly payments until the car is fully paid off. It’s like having a mortgage, in that you do not own the car until you have finished paying for it. If you can’t make the repayments, they’ll take the car back. If however you want to sell the car before the HP agreement has reached its end, you’ll probably have to pay a redemption penalty, again very like a mortgage. This will usually mean paying up to three months interest in order to be released from the contract. The HP company has another way of stopping you from doing this, which is by registering its financial interest in your car with a finance-tracking agency called HPI. It basically means that you won’t be allowed to sell your car until the contract ends at its agreed date.Personal Contract Purchase, often abbreviated to PCP, is another option and has become a lot more popular recently. With PCP you stipulate at the beginning of the agreement how many miles you expect to put on your car each year, and pay a deposit. You pay monthly and that covers the capital and interest, leaving a portion of the payment called the ‘deferred balance’ to pay at the end the contract. The advantage to PCP is its flexibility, because there are a wide array of options for the deposit and the length of the loan term. Interest rates are higher than the personal loan though, averaging at around 12.8.When the PCP contract ends you’ll have three choices:
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