Buying a new car is an incredibly common experience for many people in the UK. Last year alone there were 2.6 million cars sold, a rise of six per cent on the year before.
Yet buying a car is not only common, it’s also expensive. The record-breaking figures last year also showed that the average transaction price among those sales crept up to £22,000.
That means that a great many people have to face up to something of a financial dilemma. How do you go about affording the purchase of such a significant asset?
Of course you can simply pay for your vehicle outright. If you have the funds and you’re not stretching yourself then this is a good option. However, with the average transaction as high as that mentioned above, not many people have access to the sort of finance they need to simply pop their card in a Chip and Pin machine and pay. Even buyers who do have the money in their savings must make sure they aren’t raiding a rainy day fund that could mean they would struggle in an emergency.
Dealer finance package
If you buy your card – new or used – from a dealership, you’ll undoubtedly be offered their finance package. It’s important to remember that you don’t have to take this and it’s just one of a whole range of options open to you. Still, it’s worth getting a breakdown of what this would entail as you might be able to take advantage of any deals that they may be able to offer you. You need to find out the monthly repayments, the deposit, the APR and, crucially, the total amount you will have to pay over the course of the agreement.
You can then weigh up all of those numbers up against the terms you could get by taking out your own personal loan (get help for this with the calculator at www.moneyadviceservice.org.uk. You might find that by shopping around you pay less interest this way. Taking a personal loan also means that you effectively buy the car outright and own it in full from the start.
Alternatively, you could choose to enter into an agreement where you pay roughly ten per cent of the cost of the car up front and the rest of the value over a period of one to five years. This type of agreement is called a hire purchase because you are essentially hiring the car until the moment when you’ve made the final payment and the car is yours. If you’re shopping for a new car, you’ll probably find that this offers competitive rates when compared to other finance packages. According to What Car, 16 per cent of cars are purchased using this type of agreement.
Hire purchases are the third most popular type of car finance, after a personal loan and a leasing agreement. Car leasing comes in two forms - personal contract hire (PCH) and personal contract purchase (PCP). Both are effectively long term rental agreements that differ mainly in your preferred outcome. With a PCP you can effectively choose at the end of your contract whether you want to hand the car back, keep it or trade it in to get another new model. This offers flexibility and can mean lower repayments than a loan in the short term. Under a PCH you hand the car back at the end of your contract, without the three options of a PCP. This is often an ideal option for people who like to drive a new car every couple of years.
Some things to weigh up
With these options in mind, you need to consider a number of factors when choosing a car finance package:
*Can you really afford to buy it outright?
*What offers do dealers make available and how do they measure up to the alternatives?
*What are the monthly payments, the up front cost and the total payment over the course of an agreement?
*Do you wish to own the car or are you happy to lease?
*How long do you want to be in possession of your vehicle?
The answers to each of these will lead you towards the best option for your purchase.
Have you ever took out finance on a car? Do you have any advice to share?