If you fancy a new car when the registration plate changes on March 1, it's worth checking out the finance options as well as browsing the makes and models in the showrooms.
Of the various types of car finance on offer, loans and hire purchase are familiar, and available for buying used as well as new, while personal contract purchase (PCP) and personal contract hire (PCH) may be less so.
A number of lenders have cut the rates on personal loans over the past few weeks. AA Loans, for example, now charges interest of 4.1% on loans between £7500 and £15,000.
M & S Bank charges 3.6% for a £15,000 loan, which would mean repayments of £273 a month and total interest of £1390. Over three years, the monthly payment would rise to £440 but you would pay only £833 in total interest.
You can compare loan rates on comparison websites, but bear in mind that the best rates go to the customers with the best credit scores. Most online comparison sites allow you to 'soft search' for a loan to give you some idea of the likely success of your application without affecting your credit score.
Hire purchase plans are popular and are available through car dealers and brokers. With hire purchase, you normally put down a 10% deposit and then pay the remainder in instalments over one to five years. You only own the car until the final instalment has been paid.
You can terminate a hire purchase agreement and hand back the car if you are struggling to meet the repayments. However, if you have paid less than half the value of the car, the lender might be entitled to an additional payment. The lender can also repossess the car if you fail to keep up with the repayments.
Personal Contract Purchase (PCP) is basically a loan, but you don't borrow the full price of the car. Instead, the loan covers the depreciation in the car's value over the term of the agreement. Most PCPs run for 36 months. At the end of the term, you can pay to keep the car, return the vehicle, or take out another PCP for a new car.
If you decide to keep the car at the end of the PCP term, the company cannot ask for any more than the guaranteed minimum future value (GMFV). Similarly, if you return the car, the finance company cannot demand any further payment. So, if the car is worth less than its predicted value, the finance company bears the loss.
If you take out another PCP, you don't have necessarily to stick with the same dealer or manufacturer - and if your old vehicle is worth more than the GMFV, the money can help to fund the deposit on the new car.
Most PCPs insist on a deposit of about 10% and there are also mileage restrictions. In addition, you can be charged if you don't keep the car in good condition.
Make sure you understand the full costs of a PCP before you sign up. The interest rate on the loan is usually fixed and should be clearly displayed. Most firms also charge an arrangement fee to set up the deal and a purchase fee if you buy the car at the end of the agreement.
The big advantage of the PCP is the monthly cost. You don't borrow the full value of the car, so the monthly payments are often lower than a loan or hire purchase agreement. But the fees can be high and the conditions onerous. If you want to keep the car, you also have to stump up for the balloon payment at the end of the agreement.
Personal contract hire (PCH) is another option, though PCH is a leasing scheme so you never actually own the car. You typically pay three months' rental in advance, followed by a fixed monthly payment for the term of the deal.
Andy Bell, general manager at Glasgow-based finance broker First Vehicle Leasing, says: "Drivers are increasingly realising the value for money to be had from leasing a car - together with the sense of security that comes with the latest technological advances that the latest models feature - whilst neatly sidestepping the hassles associated with buying and selling cars."
The restrictions on personal contract hire are similar to a PCP. In other words you will only be able to drive a limited number of miles and must maintain the car in good condition.
The monthly payments are usually lower for a PCH than for a PCP. Plus they typically include a maintenance package to cover running costs, expect fuel. Remember, though, that you will not own the car at the end of the term.
If you are weighing up the pros and cons of different types of car finance, you should always add up the total costs to get an accurate comparison. It's also a good idea to find out if the lender is a member of a professional association such as the British Vehicle Rental and Leasing Association or the Finance and Leasing Association. You can then expect a minimum standard of service according to a member code of conduct.
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