Car finance for the clueless

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  • | by Kristian Dando

Casting envious glances at the stuck-up couple next door’s sparkling new '61' plate car? Fed up with the multitude of mechanical clangers your ageing motor is throwing up? Feeling the first stirrings of an imminent mid-life crisis? Then a new car might be the tonic you’re after.

Thing is, even looking at the list prices of the most ‘affordable’ new cars, they require some serious dosh – it makes you wonder how anybody can afford to drive them at all. Then there’s the matter of depreciation – new cars notoriously lose a whole lot of a value the minute you drive them away from the forecourt. And then there’s the notoriously labyrinthine area of car finance itself, a world of bamboozling acronymns and terms and conditions. At least that’s the perception…

“A lot of people don’t understand car finance, and they don’t think it’s affordable,” says Joe Pattison, general manager of sales and marketing at BMW Financial Services.

He’s got a point. Schemes like Personal Contract Purchases allow drivers to drive a vehicle for a certain amount of time – usually within three years and a fixed mileage – with the option to buy the car outright at the end, give it up, or use the equity in the car to get another brand new car, for relatively accessible prices. Providing, that is, you can make a down payment (usually 20 per cent of the car’s value) and meet the monthly repayments.

These type of deals are increasingly popular. “More people are moving on from ‘owning’ a depreciating asset and just deciding to go for a monthly payment on the best car they can afford to get. People can run the car for two or three years when it’s in warranty, and they don’t have to worry about anything going wrong. Sometimes it can be a more sensible option.”

But while it might seem appealing, be aware of what yourself getting into. “Make sure you understand how it works, and be realistic about the mileage you’re going to drive – anything over what you’ve agreed to is charged by the mile,” says Joe.

As with all financial products, only fools rush in, so make sure you’ve explored every available option to you.

A quick guide to car finance jargon

If you’re planning on paying a visit to your local showroom, then don’t leave home without reading this handy car finance jargon-buster….

Guaranteed Minimum Future Value (GMFV)

This is what the finance company guarantees the car will be worth at the end of the agreement, ultimately ensuring that there are no depreciation worries for buyers.

Personal Contract Purchase (PCP)

Fixed, low and affordable monthly payments due to a large amount of the cars value being deferred to the end of the contact. This typically comes with a GMFV and flexibility at the end of the agreement to part exchange, keep or return the vehicle.

Contract Hire

A popular option for business customers who would rather hire a vehicle than own one, without the worry of depreciation or having to sell the vehicle on at the end of the agreement. Buyers taking this option can reclaim up to 50 per cent of the VAT on their rentals, and benefit from reduced regular payments as opposed to one lump sum.

Vehicle Excise Duty (VED)

Most commonly known as road tax – and takes into consideration the vehicles fuel type and CO2 emissions. Also described as the amount of tax paid on any vehicle that will be used or parked on a public road.

Excess Mileage

Pence per mile charge applicable should the pre-agreed contract mileage be exceeded.

Residual Value (RV)

The future value of the vehicle taking in to account the age and mileage at the end of your contract. This figure is usually referred to as a percentage, so if a car is worth £20,000 new and is worth £10,000 after three years, then its RV after the three years will be 50 per cent.

Wear & Tear

When normal usage of the vehicle causes deterioration. Buyers can also take out a maintenance contract, which is a one off payment that covers the cost of vehicle servicing requirements and maintenance items such as brake pads, discs and windscreen wipers to help combat the wear and tear of vehicle.


A deal which sees the customer pay 50 per cent of the vehicle value as a deposit up-front and then pays nothing further until month 24 of the agreement. One of the three standard end-of-contract choices is then available (keep, return or part-ex). This deal is best for customers who still favour cash payments with the bonus of a guaranteed residual value.

Hire Purchase

Fixed regular payments spread over an agreed period with no mileage restrictions. Provided all payments are made by the end of the contract, the vehicle is then yours to keep. This provides the customer with an easy way of budgeting monthly outgoings.

GAP Insurance

If your car is written off or stolen, this insurance pays the difference (or ‘gap’) between the car invoice value and your insurance pay out.