Buying a new car has often been seen as a tumultuous investment indeed. Cars are one of those unfortunate assets that famously lose value the moment you drive your new vehicle off the forecourt.

Over the past few years, the options available for how you buy a car, whether that’s new or second-hand, have expanded. Rather than saving up the money and then spending it at once at purchase, more and more people are preferring some form of car finance.

In fact, according to the Guardian, 80-90% of new car sales have involved finance agreements. This is increasingly true for second-hand vehicles, too.

With this in mind, it’s important to understand the finance options you have available when buying a car, and which one is the most suitable for your needs.

Read on to discover how some of the most popular car finance methods function, and the various pros and cons to you as a driver.

Car finance provides an alternative to buying a vehicle upfront for cash

Car finance simply refers to any form of borrowing you can take out to buy a car instead of paying for it upfront.

While there are many different types of car finance, there are four forms that tend to be the most popular:

 

  • Car loan –  A form of traditional loan, you borrow what you need from a lender (often a bank, but you can borrow from a car dealership) to buy a vehicle upfront. You then repay this sum over time in instalments with interest attached.
  • Personal contract purchase (PCP) –  PCP schemes see you pay a small deposit and then make monthly repayments with interest for a set term. At the end, you can choose whether you want to trade the car in and start a new plan, give it back and walk away entirely, or make a final “balloon payment” and keep the car permanently.
  • Hire purchase (HP) –  HP agreements function somewhat like a mortgage. You pay a deposit, often around 10%, and then make monthly repayments on the loan with interest, with the loan secured against the car. You own the car once you make the final payment.
  • Personal contract hire (PCH) –  Under a PCH or “car leasing” agreement, you essentially hire a new car for several years. To begin with, you pay a non-refundable deposit and then make regular monthly payments, receiving a new car for several years that you then return when the lease period ends.

 

It’s important to note that buying on finance will almost always be more expensive than paying outright because you’ll pay interest on what you borrow.

The various car finance options come with their own pros and cons

With so many different options available for financing a car, it can be difficult to know which is the most appropriate for you.

Here are a few pros and cons to consider for each type of finance so you can compare across them.

Car loan

Pros: By going to a separate bank rather than a dealership, you could find better interest rates and terms for the loan. This essentially puts you on par with a cash buyer, too, meaning you might be in a better position to negotiate. You’ll also own the car when you finish paying the loan, which you can then hold onto for the long term or sell and use the proceeds on your next vehicle.

Cons: Finding a competitive loan that suits you could be time-consuming, and there’s no guarantee that you’ll find a lower rate than you might with any other financing option. You might also miss out on certain incentives that the dealership offers with its finance plans, and there could be delays in confirming the loan from the bank while they approve that the purchase is legitimate.

Personal contract purchase

Pros: The smaller deposit and lower monthly repayments make PCP plans highly popular. They allow you to access more expensive vehicles than you might usually be able to afford and the payments are fixed throughout, even if the car’s value drops during the time you own it.

Cons: If you don’t keep up repayments, the car could be repossessed and this could affect your credit score. PCP is also usually more expensive over the long term because of the interest you pay on both the loan and the deposit. These plans are also not that flexible, and you may face early payment fees. Finally, if the car depreciates in value while you own it, the final balloon payment could see you owe more than the vehicle is worth.

Hire purchase

Pros: As with owning a home, the main benefit of HP is that you can pay for the car over a longer period, making expensive models more affordable – you only pay a fraction of the cost upfront. HP plans are typically fairly flexible and you’ll also own the car at the end, meaning your repayments go towards owning a tangible asset.

Cons: In return for these benefits, you may face a higher interest rate than on other options. The deposit can also be a barrier if you don’t want to spend a lump sum towards the car. You’re also usually locked into the agreement until you’ve paid it off, meaning there’s little flexibility. Finally, there may be other fees to consider, such as setup fees and late payment penalties.

Personal contract hire

Pros: Under a PCH agreement, you can enjoy a new car for set repayments without the high costs of buying outright. This makes it easy to regularly change to a newer model at the end of the agreement if that’s your priority, and you aren’t tied into owning the vehicle at all.

Cons: You can typically only do this with new vehicles, so you’re less likely to be able to find a second-hand car available on PCH. Furthermore, when the agreement ends, you have no tradeable asset as you’ve only leased the vehicle. And, while you can switch to a new car at the end of the term, you usually can’t do this during the period unless this was agreed at outset.

Choosing the right option will depend on your circumstances

If you plan to use a car finance plan rather than paying for a vehicle outright then, as with any financial decision, the right option will depend on your individual circumstances. It’s worth doing some research and seeing which one would most suit you.

Firstly, you might want to consider whether you want to own the car at the end, or have the additional flexibility of moving to a different one when the term finishes. This could make a significant difference in the decision you ultimately come to.

Then, it’s worth comparing the interest rates and terms of the finance plans you’re considering and working out what you might have to pay overall. Although you might be tempted to choose the option with the smallest deposit or lowest monthly repayments, this could work against you in the long run when you factor in the interest you’d have to pay during the period.

You may also want to consider the associated costs of a specific car. Factors to think about could include:

 

  • Fuel consumption
  • Insurance
  • Road tax
  • Servicing and maintenance (some car finance options may include this)

 

Thinking about all these factors can help you make an informed decision so you ultimately drive home in a new car with payment terms that suit you.

Get in touch

If you’d like help organising your wealth to achieve your goals, then please do get in touch with us at Cordiner Wealth.

Email hello@cordinerwealth.co.uk or call 0113 262 1242 to speak to us today.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.