So, you’re thinking of buying a new car, an exciting time but for most it’s the second most expensive purchase you will ever make. In 2017, 86% of all new car registrations use some form of credit and with the plethora of options available from PCP deals to credit cards, which is right for you? Here at Budget Insurance, we have put together a quick guide to help you make the right decision to finance your flash new wheels.
First and foremost, whilst a car is a functional commodity in this day and age it remains an emotional purchase, make sure to consider your options before you fall in love with a car you can’t actually afford! A great place to start is to understand what your credit rating is, there are a number of free services available that can both display and help you work on your score. If there are any errors, you can get these rectified and you’ll have a good idea for the kind of deals you could qualify for when you actually purchase. However, be aware that by using these services, you may have entered into a contract where if they don’t cancel within a certain amount of time you will be automatically charged.
Car cost calculators are available online to help you consider the full cost of maintaining a vehicle, beyond just what you are actually set to pay for the vehicle. Tax, MOT and servicing, insurance and fuel efficiency all need to be taken into account when finding the right car for you and your budget.
Let’s start with the simplest option, you have savings stored away and can use those to cover the whole cost of the car.
• Avoiding lending any money, this is the most cost-effective option.
• You own the car in full straight away and if you need to sell at any point, whatever it is worth you can keep.
• Make sure you still have savings left for emergencies.
A personal loan is a lump sum offered to you by banks, building societies and finance providers which is paid back, plus interest, in monthly instalments usually over a 1-5 year period.
• Can often be easily arranged online, with face-to-face and phone options still available.
• Competitive fixed interest rates can be found by shopping around. Many websites will aggregate options for you.
• Other borrowing could be affected.
• Understand the difference between a ‘secured’ and ‘unsecured’ loan. A secured loan, against your home for example, puts it at risk if you’re unable to afford the repayments. As long as your credit rating is good, unsecured loans are commonly offered at very competitive rates.
PCP (Personal Contract Purchase)
A PCP starts with a deposit contribution by you which is variable from the typical 10% of the overall value, down to nil in some cases depending on the car and deal on offer. The best way to think about it from this point is you get a loan for the difference between the cost of the car brand new and the predicted value at the end of the agreement. This predicted value will be based on the mileage you expect to do and the length of the agreement, usually from 12-48 months. At the end of this period you then have a few options:
• Pay a final payment, also known as a “balloon payment” and the car belongs to you.
• Hand the car back and pay nothing.
• Trade the car in and start all over again.
The balloon payment will normally range from a few to many thousands of pounds, a significantly larger expense than your monthly payment.
• Monthly payments are usually lower than most other forms of finance.
• Low deposit in relation to overall value of car.
• Exceeding mileage will result in additional charges.
• Until all monthly instalments have been paid, plus the final payment you do not own the car.
• The total cost to own the car will typically be more than other forms of finance.
Credit cards are often used for big purchases with home improvements or holidays and can be a viable option for buying a car when handled correctly. The most attractive option is, depending on your credit rating, being able to secure an ‘interest free’ credit card. A typical scenario might be a 24 month interest free card with £5000 credit; this means you will be able to spend up to £5000 and will have 24 months before any interest is charged on money you owe. If that money can be paid back within the interest free period, it will not have cost you any additional money on top of the purchase.
• Credit cards come with extra security on most purchases. Payments of over £100 are protected under the Consumer Credit Act and you have joint liability with your credit provider, this is great protection to have if there were any issues with the delivery of your new car for example.
• Interest payments can be very high outside of the interest free period. Understanding your ability to repay within a certain period is a key concern.
• Beware of additional fees for missing payments or exceeding your credit limit.
HP (Hire Purchase)
Hire Purchase is a similar, albeit simpler model to a PCP deal as mentioned above. A deposit usually of around 10% is required and then fixed monthly payments are made over an agreed period. These payments cover the cost of the car plus interest and you own the car once the final payment is made.
• Usually quick and easy to arrange with the dealer where the car is being bought.
• Competitive fixed interest rates and payment term can be flexible depending on budget.
• You do not own the car until the final payment is made.
• Early repayment charges are common and short term arrangements can be more expensive.
We hope that helps explain some of the main options available to you, before you make your final decision, remember:
• Make sure you can afford the monthly payment, not just now but for the whole length of the loan.
• Ask the provider offering you finance what happens if you cannot pay for a month or what options you have to cancel.
• Compare the TOTAL cost of borrowing, look for the lowest APR where you can but also consider additional charges on mileage or early/missed repayments.
• Understand and look after your credit score, the better your credit history the lower the interest rates providers will require you to pay.