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Financial options to consider when buying a new or used car

Many purchases require you to, well, have the entire sum of money ready outright. But for a car purchase, this isn’t always the case. Volkswagen dealership Vindis, for example, have a number of finance options for those looking to buy a new or used car. The following article will take you through these financial options, so you can decide which is best for you.

Options for new

Take a personal loan

A bank or building society can provide you with a personal loan, which you then pay back over the course of one to seven years. According to a survey by WhatCar? a personal loan is the most popular way to finance a new vehicle, with a third of those who were involved in the motoring publication’s poll saying they favoured this finance option over all others.

Often, a personal loan can be the cheapest way to borrow money, and as you’ll be buying the car outright, you’ll also own the car immediately. Competitive fixed interest rates can be gained if you shop around for your personal loan too, while you often won’t even need to worry about paying a deposit to get the loan.

There are other benefits to using a personal loan for your new car purchase too. You don’t need to worry about yearly mileage restrictions, and you won’t need to send the car back to the dealership once the loan is paid off. Just be sure that you can keep up with your payments, as any of your assets can be seized should you be unable to pay one of your instalments — only your vehicle will be vulnerable to being reprocessed should the same thing happen with dealer finance.

Taking out a personal loan will need you to have a clean credit rating, and you’ll win out against your car’s depreciation as you’ll own the vehicle as soon as you take out the loan. Ensure the vehicle that you have your eyes on will be something that you can imagine driving for years to come, as the lender will still require you to repay the full loan even if you sell it or it gets written-off.

HP — hire purchase

The next simplest way of buying a car is a hire purchase. Sixteen per cent of those involved in the earlier mentioned WhatCar? survey admitted they favoured this type of car finance. After typically paying a deposit — usually 10 per cent of the car’s total value at the time of purchase — you then repay the remaining balance in monthly instalments, plus interest, throughout the rest of the loan period.

When the loan is fully paid off, the car will then belong to you. Up until then, you won’t need to be concerned about any excess mileage charges and there’s no reconditioning costs to worry about either.

HP agreements come with a few consumer rights to be aware of. You may be able to return the vehicle once you’ve paid half the cost of the vehicle and not be required to make any more payments, for instance, while your lender will not be in a position to repossess your car without a court order after you’ve paid a third of the entire amount that you owe.

The vehicle isn’t yours until that final payment, however. Miss a payment or a collection of them and you could well be at risk of losing the car. Likewise, you won’t have a legal right to sell the car until all payments have been made.

PCP — personal contract purchase

Personal contract purchase came second in the WhatCar? poll, with a quarter of people asked saying PCP was their preferred method of contract purchase. You again pay a deposit, which is often ten per cent of the vehicle’s overall value too, before paying a series of monthly instalments.

The difference between PCP and HP is that with PCP you’re paying for the deprecation in the car’s value as you pay the monthly instalments. Once you reach the end of the contract term, you’ll be presented with three options with what you want to do next:

  1. Return the vehicle to its supplier — this won’t cost you anything unless you’ve exceeded your agreed mileage or fail to return the car in a good condition.
  2. Take full ownership of the vehicle — though for this option, you will be required to make a final ‘balloon’ payment. This amount will be the car’s guaranteed future value, or GFV for short.
  3. Trade the vehicle in and use any GFV equity as a deposit towards getting your hands on a new set of wheels.

Basically, the GFV is where you will repay the difference between the worth of the car at the end of the contract, and the worth of the car at the start of the contract, with interest. Take note too that the GFV will be agreed before a PCP contract begins, though so too will a mileage allowance — and any excess mileage charges will apply if you go over this limit.

There’re a few other points to contemplate when it comes to PCP finance options too. You will be unable to sell the vehicle during the contract period of the PCP agreement, as you won’t own the car during this term, while some PCP contract providers will have a limit on the number of days that a vehicle can be out of the country — something that’s certainly worth thinking about if you drive abroad at least from time to time.

If you opt to settle at an earlier date, you will have to pay the difference between the car’s current value and any outstanding payments. Early settlement charges sometimes apply here too, so bear that additional cost in mind too when thinking about doing this.

PCH — personal contract hire

PCH is a leasing option. This is because you will never own the car in question when taking out a PCH plan; it must be returned at the end of the contract term. Instead, you’ll pay a dealer a fixed monthly amount to use one of their vehicles. Fortunately, the costs of servicing and maintenance are both factored into this amount. Once a PCH agreement ends, you simply hand the car back to the dealer and needn’t worry about the vehicle depreciating in value.

If you like to swap your car frequently, this is the option for you. However, take note that you must ensure the vehicle remains in good condition during the entire time it’s in your possession and that you don’t exceed the annual mileage limit agreed at the start of the agreement — extra costs could come your way otherwise.

Buying used option

HP and PCP finance can also be used when buying a used car. The same principles apply. Of course, you can also take out a personal loan when looking for a way to finance a used car.

Leasing, however, isn’t as simple with used cars. Some dealers will allow their second-hand vehicles to be leased, but not all of them. Many dealers will determine the amount that you have to pay on a monthly basis based on how much they expect the vehicle that’s being leased will depreciate over the finance term you have in mind. This may result in you witnessing more expensive leasing deals that you’d have expected though, as the residual values of used cars are usually more difficult to forecast and so dealers will be aiming to always cover the cost of any unexpectedly severe depreciation periods.

This guide should help you figure out which finance option is best for you. Enjoy your new wheels!

Sources:

https://www.moneyadviceservice.org.uk/en/articles/car-finance-explained

https://www.moneyadviceservice.org.uk/en/articles/whats-the-best-way-to-finance-buying-a-car

https://www.which.co.uk/reviews/new-and-used-cars/article/car-finance-explained

https://www.whatcar.com/advice/buying/car-finance-explained/

https://www.telegraph.co.uk/cars/advice/new-car-finance-options-explained/

https://www.carwow.co.uk/guides/buying/can-i-get-a-used-car-on-finance