How to decide which car finance type is right for you
When it comes to buying a new car, finding the perfect finance package can be a daunting task. Even if you are offered a company car allowance, most people would be looking for funding towards the vehicle you really want. Deciding which finance option is right for your lifestyle and budget is important.
How much can you afford? Would it be better to pay a bit at a time? How long will you be paying for? What will be the long term cost?
All these things need to be taken into consideration before entering into a Car Finance Agreement. Of course, you will be wise to consider any running cost by factoring in any up-front purchase costs, fuel prices, insurance, road tax and maintenance. However, you may be surprised by what you can afford with the many finance packages available.
Car buying options for company car allowances.
Firstly, if you have been allocated a company car allowance, you may choose to use the money to either buy your own car or lease a vehicle privately. This is a sum of money which is added to your annual salary for the purpose of allowing you to buy or lease a vehicle.
If you choose to buy the vehicle yourself, you will be responsible for maintaining and insuring the car, as well as monitoring expenses.
If your allowance does not quite reach to buy the car you dreamed of, then you can either top this up with a one off payment or take up one of the many finance options available.
Remember, you will be paying a BiK (Benefit-in-kind) tax charge, which applies to any employee who receives a company car. Low CO2 emissions are crucial to reducing your BiK tax liability, so it’s worth looking at a Hybrid or Electric vehicle which offers zero or reduced CO2 emissions.
Which is the best car finance option for you?
Generally, the two most popular finance types are Personal Contract Purchase (PCP) Finance and Hire Purchase (HP) Finance, which both offer options to spread the cost over time – however, other choices are available that might be more suitable.
Let’s explore all the options to help you decide which one is best for your personal circumstances.
Personal Contract Purchase (PCP)
PCP finance is ideal if you like to switch your car frequently.
The PCP process begins by considering your initial deposit (or part exchange), the length of the term, and the number of miles you want to travel each year — once these factors are taken into consideration, the monthly payment can be calculated.
A smaller deposit, shorter period, and more yearly miles will almost certainly raise the monthly payment, whereas a larger deposit, longer duration, and fewer annual miles will likely lower it.
The fact that you do not initially own the vehicle is a crucial feature of this financing plan; nevertheless, you will be offered the choice to do so at the end of the agreement. This alternative payment, known as the Guaranteed Minimum Future Value (GMFV), covers the majority of the car’s value, resulting in cheaper payments than with Hire Purchase.
At the end of the term, you’ll have the choice to either:
- hand the car back and walk away
- use any equity in the vehicle towards a new one
- or pay the final payment and make the car yours
A few things to consider with PCP finance when handing the car back are:
- the condition of the car
- any damage over and above general wear and tear could see you have to cover the cost of repairs
- excess mileage
- if you exceed the amount of mileage you said you’d do, then you may be charged a certain cost per exceed mile
Hire Purchase (HP)
If you want full ownership of the vehicle, this type of financing is ideal.
If you want to split the expense over time with fixed monthly payments and no mileage restrictions, HP is a fantastic choice.
There are various ways to keep prices down with HP, such as the amount of deposit you can give or the value of a part exchange for your present vehicle.
In addition, the term duration can affect your payments by increasing or decreasing them.
Once you’ve made the final payment, you’ll have full ownership of the car at the end of the agreement.
Personal Contract Hire (PCH)
If you desire a new car every few years, this is the funding for you.
If you want to keep up with the latest car models but aren’t interested in buying one, leasing a car can be the best option for you.
In essence, you are only paying for what you use, therefore there is no need to be concerned about vehicle depreciation.
The duration and mileage must be agreed upon, then what is usually referred to as Initial Rental is arranged as the upfront payment, after which, the contract can begin.
PCH has the same restrictions as PCP in terms of excessive wear and tear and annual mileage.
Conditional Sale (CS)
You have another fantastic option of outright ownership.
With Conditional Sale, you will be the registered keeper. During the period, however, the finance company owns the vehicle, and after the final monthly payment is paid, the vehicle is yours.
You normally pay a 10% deposit (which can be contributed to with a part exchange vehicle), then choose the length of the agreement with a fixed interest rate.
You can budget your monthly payments with these flexible terms.
Peer-to-peer loans (P2P)
Getting a loan through a financing platform is a more recent development in finance.
Peer-to-peer loans are becoming more popular, as they allow people to borrow money directly from other people by pairing a lender with a borrower.
This is a rather simple option to finance a car, and it’s worth looking into if you’re having trouble being approved for financing elsewhere.
Because P2P loans are unsecured, your vehicle will not be repossessed if you miss a payment.
Rate to risk finance
This could be the route you pursue if your finance application is high risk.
The lender evaluates the risk depending on a number of factors, including the vehicle, deposit, equity, and the buyer’s credit score.
If the application is deemed high risk, the interest rate as well as the monthly payments would rise. If they’re willing to lend depending on your monthly expenses, the rate-to-risk ratio is something to think about.
0% car finance deals
Many dealerships represent manufacturers who can offer no-interest financing on selected vehicles, which is a popular choice. It’s ideal for individuals who don’t want to increase their costs over time.
Just keep in mind that obtaining 0% financing will almost certainly necessitate a good credit score and potentially a larger deposit than usual.
No deposit deals
This is the package you’ll need if you don’t have a cash deposit or a vehicle to trade in.
You may lack the funds to put down a deposit or a vehicle to trade in, but this does not exclude you from qualifying for a car loan.
A no deposit loan package may be the best alternative for you because it does not demand any upfront cash. However, this will have an influence on your monthly payments, which may be larger than you anticipated.
If you’re shopping for a new car, keep an eye out for a manufacturer deposit contribution. These can be in the thousands of pounds and compensate for the fact that you are unable to put money aside.
With so many alternatives, it’s easy to see how some people would become overwhelmed. However, taking the time to look at each finance type and understand the benefits and drawbacks for yourself will greatly aid the decision-making process.
Any decent car dealer will go over the financing options with you once you’ve selected your dream car, but it’s best to do your homework first, so you don’t go in blind.
