Car Finance, The Pros and Cons of Financing your next car purchase
Choosing a method of car finance can be as confusing as choosing a car itself.
Just as there are many makes, models and specifications to pick between when opting for your vehicle of choice, there are many methods of car finance which each present their own strengths and weaknesses.
Why you should plan ahead and budget.
The most important factor when deciding on a method of car finance is to plan ahead. Make sure you research the topic (as you are doing here!) and think carefully about which car finance option suits your circumstances. Consider what you can comfortably afford each month, and how much you can afford to pay in the long term. Look at all options when choosing car finance – choose the option that is right for you.
Also try and save money wherever you can – shop around for the best deals, consider buying a new car online and familiarise yourself with the value of the vehicle you’re purchasing.
What are the different methods of car financing available?
There are many car finance options available to you – broadly these are buying the car outright; hire purchase; personal (car loan); car leasing and personal contract plans. The following sections examine each method and their pros and cons.
Buying the car outright: pros and cons.
If you have plenty of money to spare, buying outright is the most cost effective option as there are no interest payments – you simply pay for the value of the car.
Advantages of buying a car outright…
- No interest to be paid.
- You own the vehicle immediately.
Disadvantages of buying a car outright…
- Involves a large sum of money leaving your account at one time.
- No long-term security.
Hire purchase: pros and cons.
For most this is the traditional way of financing a car. It’s often arranged through a dealer but you can approach car finance companies directly if you wish. In effect you are hiring a car with a right to buy – you do not own the vehicle until every repayment is made.
Hire purchase advantages…
- The car is yours at the end of the term.
- Rates and minimum deposits are generally low.
- Total interest should be low and may be negotiable.
- You can end the agreement voluntarily and settle any balance remaining on your agreement.
Hire purchase disadvantages…
- If you don’t keep up repayments your car may be repossessed.
- Hire purchase rates can be higher than the leading personal loan rates.
- Monthly payments will be higher than leasing or PCP.
Personal loans: pros and cons.
You approach a bank or a loan provider for a car loan. You then take that cash to the dealer and buy the car outright. Your repayments are made to the loan company. Remember to shop around for a good loan rate.
Personal loan advantages…
- The loan is not secured on the car so you can sell whenever you like.
- Total amount of interest to pay is low compared to other options.
Personal loan disadvantages…
- Don’t assume it is a cheaper option than hire purchase – some dealers make commission by selling loans and so they might offer better deals.
- Monthly payments can be high, especially if you have a less than excellent credit rating.
Car leasing: pros and cons
With this method of car finance you pay a monthly sum over (usually) a two-four year period and at the end of the agreement you simply hand the car back in. You never own the car though some leasing companies will give you the option to buy at the end of the term.
Car leasing advantages…
- Great for those who want a new car every few years.
- Monthly payments are generally low and there is nothing to pay at the end.
- Generally only a small deposit is required.
Car leasing disadvantages…
- The car is never yours – though some leasing companies will give you the option to buy.
- The long-term cost of leasing will exceed that of buying if the owner keeps his vehicle for years after the loan end.
- You will be given a mileage limit and will be charged for exceeding it.
Personal contract plans: pros and cons
Personal contract plans (or PCP), is a similar process to hire purchase but you don’t buy the car at the end of the term. Instead the manufacturer/dealer works out how much the car will be worth at the end of the term and you pay off the difference, plus interest. At the end of the term you can buy the car outright, walk away or use the difference as a deposit on your next car.
Personal contract plans advantages…
- Low monthly payments.
- Maintenance charges are often included.
- If the car is worth more than the predicted value you can sell it on; if it’s worth less you can hand it back to the car finance company.
Personal contract plans disadvantages…
- You will be given a mileage limit and must stick to it if you want to return the vehicle at the end of term.
- At the end of the term you do not own the car unless you are willing to pay the balloon payment or take on another loan.
- Chance of a negative equity is higher than with other loans.
What other factors should you be aware of?
Always remember to ask for the ‘total amount payable’. This is the total cost to acquire the car after all interest payments and additional fees are included.
Also be aware of additional charges – such as administration and documentation fees that can be used to bump up a car finance company’s profits.
Look out for special offers too – such as 0% finance. Though on the surface this appears to be the most cost effective way of buying a car, there are often conditions attached such as paying up to a 50% deposit or paying off the loan within one year.
Finally, be wary of taking on more than you can afford. It is not a good idea to extend your mortgage to finance a car as you will pay far more in the long term. Always think about what you can comfortably manage on your budget.
Where should you go to finance a new car?
gauk Motors is one of the busiest motoring web sites in the UK and enables user to look at offers from brokers, main dealers and car supermarkets. You can look at the car financing options and cars available online at your leisure.