Guide to financing your new or used car

For the majority of people, buying a new or used car is something that has to be thought about carefully in terms of finance.

There are usually a number of money-related questions that typically come to mind when you are contemplating doing the rounds of the dealerships and car advertisements:

• Can I afford it at all?
• How much can I afford to spend?
• Where will I find the deposit?
• What will the repayments be like?
• What happens if I want to change the car in a couple of years’ time or so?

To some extent, the way you answer those questions might influence the type of car finance deal you eventually opt for. So, in this brief guide you will find a list of the major options that might be available to you and a brief discussion of their advantages or otherwise.

Picture courtesy of nakhon100.

Car dealership finance / manufacturer’s special deals

When you go into some of the larger dealership outlets, you may well see advertisements relating to various financing deals.

Although sometimes these carry the brand of the dealership or even one of the major car manufacturers, in reality they are usually some variation or another on some of the above options. You may find that in some cases the dealership is simply acting as the selling agent for an individual hire purchase or other type of finance company such as Santander.

As such, the finance can’t be separately described here because it may encompass any one of many different types of borrowing.

In very general terms though the major attraction of this type of finance is that it allows buyers what might be termed one-stop shopping. In other words, you can buy your car and your finance from the same person sitting behind a desk in the sale room.

However, it’s worth keeping your business head on in relation to these types of deals. Look closely at things such as interest rates and of course you may find that finance is only available on vehicles in the dealer’s showroom or sometimes even only on specific makes or models.

Some dealerships may make significant margins on selling finance and that means they may work very hard to try and sell you their option.

Picture courtesy of The National Roads and Motorists’ Association

Car finance brokers

If you are looking to get the most suitable and cost-effective deal possible for financing your vehicle, the chances are you’re going to end up needing to do a fairly significant amount of research on the internet and possibly elsewhere.

As you probably know, not all deals are necessarily going to be available to you and some may have particularly demanding requirements for things such as your income level and credit history scoring.

If you don’t like the idea of going from one company to another trying to see what is on offer, you could go to one of the car finance specialists such as Carfinance247.co.uk who aim to find you the most cost-effective and suitable deal for you.

These organisations aren’t actually tied to any one source of finance and they will look across the whole market place on your behalf to try and find some of the best and most suitable options out there.

This is great because not only will this save you quite a bit of time and effort but it might also highlight options that you wouldn’t necessarily have known were out there. They also won’t be constrained to thinking about one particular type of finance for your situation but in line with your requirements and situation, they might draw a number of different approaches to your attention.

There isn’t really a downside to getting this expert assistance – you can actually get some indication of how much you might be able to borrow and the repayment costs without any obligation, as some of them offer online finance calculators.

The specialist might even be able to help you if you have a less than exemplary credit history record.

Another benefit is that you can choose to get your car from wherever you wish, nationwide, so you won’t be tied to one specific dealer or manufacturer.

Picture courtesy of karl frankowski.

Personal Contract Purchase, Lease-Purchase, Contract Hire

There may be a number of options open to you in this category, including some of those listed above. You may also encounter other finance descriptions that share certain characteristics of these products.

• In a number of important respects, these schemes are different from the old standard loan-and-repayment-over-time type arrangements. Space doesn’t permit a full discussion of each individually but they may share some relatively common characteristics:
• You typically won’t own the vehicle while you are driving it – it will remain the property of the company financing the deal;
• As a result, you won’t be able to sell it or make particularly significant modifications or customisations in order to meet your own tastes;
• There may be limitations imposed relating to your annual mileages and if you pass them, you may find yourself needing to pay more;
• You might or might not need to find some sort of up-front payment that is roughly akin to a deposit. In some situations the initial payment sums may be variable depending upon the subsequent payment option plan you select;
• Each month you will pay a set amount to the finance company for the use of what is essentially their vehicle;
• In some cases, although you will be responsible for fuel, insurance and perhaps the cost of any repairs arising as a result of your activities, the finance company may meet the costs of road tax, maintenance, breakdowns and repairs;
• At the end of the agreement period, the vehicle will be returned to the finance company and you will have nothing – unless you decide to select a final payment and purchase option that might come along with some of the above funding products.

The advantages of these types of finance deal are that they may, in some cases, reduce your annual running costs and you will typically be driving a new or nearly new vehicle. They might enable you to get a make or model of car that you might not be able to afford if you were actually going for an outright purchase itself.

If you are the type of person that likes changing your car relatively regularly these options might help you to achieve that. A good source of information on car leasing is WhatCar!
On the downside, these products sometimes involve what accountants call sunk-spend. That’s because at the end of it, unless you select the final purchase option, you will have paid out a lot of money over time and you won’t have any asset to show for it.

Picture courtesy of John Lloyd.

Hire purchase

This is cosy and familiar to many of us because it is one of the oldest forms of using loans to buy major items.

It typically works very simply:

• You will select a car and apply for hire purchase finance;
• Typically you will need to find some sort of initial deposit payment towards the vehicle;
• If approved, the loan will pay off the balance of the purchase price of the car and you will then repay the finance company on a month-by-month basis;
• For the duration of the repayments, your vehicle is not yours and belongs to the hire purchase company;
• Once you have made the final payment, the vehicle becomes yours.

This option has the big advantage of being one that many buyers are already familiar with. It’s also a relatively uncomplicated process.However, there are a few issues to be aware of.

Perhaps the most significant of those is that if you are unable to continue your repayments, the lending company may repossess your car relatively quickly.

Be aware that does not necessarily mean that your debt to them will be wiped out. Repossessed vehicles are typically sold quickly and the difference between the sale price and the amount you borrowed from the finance company will still be a debt you owe to them.

Picture courtesy of Nicolas Serre.

A word or two on cash purchases

It might be the case that you have some spare cash and are wondering whether or not it might be better to buy your car outright with a simple old-fashioned cheque.

The advantages to doing so are pretty clear. You won’t have to worry about things like credit scoring, on-going debt and of course the car will be yours immediately. Cash might also enable you to hammer some particularly good bargains with some dealerships.

Having said that, it’s not necessarily always the best financial use of cash. It might be that your cash could be used to better effect in terms of your overall financial position by, for example, paying off other expensive debts you may be carrying or by it being injected into your business etc.

So, don’t just assume that paying by cash is always the best option, but do your sums thoroughly before instead.

Thank you to Louis Rix, Director at Carfinance247.co.uk for writing this informative guide.

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