It is worth keeping in mind from the outset that there is no one, single most suitable way of financing a car purchase. There are benefits and drawbacks to most of your options and the one that is most suitable is the one most appropriate to your particular, individual needs and circumstances – and by so doing, represents good value for money in terms of the price you pay for buying a car on credit.
So, what are some of the options that might be posed?
Practically any motor dealer you visit is going to offer some form of deal for financing the purchase of the car you are viewing on the forecourt. After all, this increases the dealer’s chances of concluding the sale and also earns a handsome commission from the finance company arranging the credit agreement.
As a captive customer, however, you might never be sure that the car finance offered represents the best value for money – or indeed suits your particular circumstances. Added to that, of course, is the fact that any finance is available only to a vehicle to be sold by that particular dealer.
As with many financial transactions, there is a lot to be said to avoid seizing the first offer to be made, to stand back and be somewhat more savvy in your decision.
On this score, it might be interesting to note that women tend to be more finance savvy when it comes to buying a car than their male counterparts, according to research conducted in August 2016 by independent finance brokers Financible.
One of the options likely to be offered by any car dealership is hire purchase. This is a well tried method of buying on credit and involves the down payment of a deposit (typically around 10% of the purchase price), followed by regular monthly instalments and a final payment to complete the balance of the purchase.
As the term suggests, you are effectively hiring the vehicle from the hire purchase company until ownership passes to you only upon the payment of that final instalment at the end of the agreement.
Whilst the vehicle is subject to the terms of hire purchase you may not sell the car without the owner’s permission and if you fail to pay the agreed instalments the hire purchase company may repossess the vehicle.
Personal contract purchase (PCP)
Also known as personal contract plans, these amount to your lease of a vehicle – typically for a period of up to three years – whilst deferring your decision whether or not to buy it until the termination of the lease period.
After making an initial deposit, you need to make regular monthly payments for the lease of the vehicle and these are relatively low, since you are leasing rather than buying the car at this stage.
At the end of the lease period, you might simply hand back the car to the owners or pay a final “balloon” payment representing the current or “residual” value of the vehicle (a guaranteed value that was agreed at the beginning of the contract).
If you decide not to go ahead with the purchase, you might nevertheless want to enter a new contract agreement and thereby ensure that you continue to drive a new or nearly new car.
The motoring magazine Auto Express, in an opinion dated the 23rd of June 2016, suggests that PCPs are flexible and have relatively low monthly instalments, but hire purchase may be the more economic option if it is your intention to eventually own the car.