Ahead of September’s new 66 registration plate Gocompare.com Money considers the pros and cons of different new car financing options
A new car can be one of the most expensive purchases most of us will make. How we choose to finance it will make a big difference to the overall cost of driving a new car. According to figures from the Finance and Leasing Association1, in 2015 over 80% of all private new car registrations in the UK were financed through its members.
But what’s the best way to get behind the wheel of a new car? Gocompare.com Money examines the pros and cons of the different options available to new car buyers.
Pros: Depending on your personal circumstances and the car you want to buy, paying cash can, in the long-term, be the cheapest way to buy a new car. Some dealers offer cash discounts. Owning the car outright means that don’t have to worry about meeting monthly repayments or incurring interest.
Cons: You are investing your money in a depreciating asset. Depending on the price, running costs and quality, new cars typically lose between 50% and 60% of their value over the first three years.
Pros: A personal loan, whether it’s from a car dealer, a bank or building society, allows you to spread the cost of a new car. Over the long-term it can be one of the cheapest ways of borrowing money to buy a car. It gives you the flexibility to choose the loan period (but, the longer the term of the loan the more interest you will pay) and you can borrow money to cover the whole cost of the car or a just a proportion. You can cut the cost of a personal loan by shopping around and comparing the best deals on offer. A personal loan enables you to own the car outright (the car isn’t secured against you defaulting on the loan), so if needed, you could sell the car before the end of the loan period. A loan also allows you to still negotiate with the dealer on price.
Cons: The rate you will be offered will depend on your credit history. If you have a poor credit rating you will have to pay a higher rate of interest or may find it hard to get a personal loan. For the sake of convenience, it can be tempting to just sign-up to a loan offered by the car dealer, but you should always compare the rate offered by the dealer against other personal loans. You are borrowing money against a depreciating asset.
Pros: Depending on the type of card you use, paying by credit card can be a cost effective way of buying a new car. For example, a 0% purchase credit card allows you to spread the cost of the car and if you repay the loan within the interest-free period, you are effectively benefiting from a 0% loan. Credit card purchases costing over £100 and up to £30,000, are covered by ‘section 75’ of the Consumer Credit Act, which means the card company has equal responsibility (or ‘liability’) with the seller if there’s a problem with the car or the company you’ve bought it from fails. You don’t need to pay the full price by credit card, paying just part is enough to get you the legal protection.
Cons: Not all dealers accept credit cards, others charge a credit card handling fee (1-3%) which will increase the cost of the car. You will need a goodcredit rating to get the best interest rates and sufficient credit limit. On a 0% purchase card, the interest rate may be high if you don’t manage to repay the debt within the interest-free period. You are borrowing against a depreciating asset.
Hire purchase deals
Pros: After paying a deposit of typically around 10%, you pay monthly instalments, which cover the cost of the car plus interest, for the duration of the agreement. A hire purchase deal, subject to you meeting the lender’s criteria, can enable you to borrow a larger sum of money than is available under a personal loan (which is typically capped at £25,000).
Cons: The finance company ‘buys’ the car and ‘takes it’ as security meaning that you do not own the car until the loan has been repaid. If you default on the payments the lender can repossess the car. You are unable to sell the car until the loan has been repaid.
Personal Contract Purchase (PCP)
Pros: A finance company buys the car and you pay a deposit and monthly instalments to use the car until the contract expires. At the start of the contact, the finance company gives the car a guaranteed final value (GFV). The GFV will depend on the deposit paid, your monthly instalments and your annual mileage. Subject to meeting the mileage and other conditions such as regular servicing, the company guarantees the car will be worth at least the outstanding balance remaining on finance at the end of the agreement. At the end of the contract, you have the option to make a payment equalling the GFV and take full ownership of the car, hand the car back to settle the remaining finance or if the car is worth more than the GFV - use the difference in value as a deposit towards another car. Payments under a PCP can be lower than for other types of car finance. A PCP allows you to drive a new car every few years without owning it (if you don’t want to).
Cons: PCP contracts impose a mileage limit and penalties apply if you exceed it. Over the term of the PCP you may have only paid off the car’s depreciation so at the end of the contract you will not have any equity in the car. PCP can work out as an expensive way to car ownership – so it’s important to calculate the total cost of the deposit, GFV and monthly payments. A PCP is usually more expensive than a hire purchase deal, with larger deposits and monthly repayments. You may face extra fees for any damage or wear or tear to the car
Pros: A personal leasing arrangement allows you to drive a new car for an agreed period and number of miles - without owning it. Leasing arrangements may include other costs such as servicing, tax and insurance. Without the need to buy or sell a car – changing vehicles is easier under a personal leasing arrangement. Monthly payments tend to be lower. The leasing company bears the cost of the car’s depreciation.
Cons: No matter how long you lease the car for, you won’t own it. Mileage limit imposed with penalties for exceeding it. You may face extra fees for any damage or wear and tear to the car.
Matt Sanders from Gocompare.com Money commented, “From cash to credit cards, loans to leasing - there’s never been more options available to car buyers. But the best way to fund a new car very much depends on your personal circumstances, the way you drive and the vehicle you choose. Therefore, it’s really important that as well as pouring over new car brochures to find the perfect car, buyers check out all the options on finance and weigh up their different pros and cons.
“Depending on your chosen finance option, your calculations should include: the deposit you’re required to put down, the monthly repayments, including the interest rate and any other charges over the term of the loan. Don’t forget to include costs payable at the end of an agreement - for example for damage or a limited mileage penalty. And, if you’re buying the car, you’ll need to factor depreciation into your sums. The other car running costs you’ll need to consider are fuel, tax and insurance. Where finance is required to fund a purchase, to protect their investment the lender will to require you to hold fully comprehensive car insurance.
Matt Sanders concluded, “However you chose to fund a new car, one sure fire way to save money is to shop around and compare prices. Rather than just agreeing to the finance offered by the car dealership, check whether you can get a more competitive deal elsewhere. By using a loan comparison tool you can quickly and easily compare both general loans and car-specific finance. Otherwise any money off you’ve haggled with the car salesman could be more than wiped out by choosing the wrong finance deal.”
For more information see Gocompare.com's guide on car financing and loans.
- ENDS -
Notes to editors:
1The percentage of private new car sales financed by FLA members through dealerships reached 81.4% in 2015, up from 75.9% in 2014.