April 23, 2024
Finance

The best ways to buy a new car (and it could save you money)


Personal Contract Purchase (PCP)

The most common form of credit, personal contract purchase (PCP), accounts for the most car finance deals. These contracts split the cost of the vehicle into monthly payments over a set period of time – usually between two and five years.

Monthly payments cover the expected depreciation of the vehicle’s value, as opposed to actually going towards the cost of it. 

You typically have three options when the contract ends: 

  • pay off the rest via what is called a “balloon payment” and own the car 
  • trade up for a newer model at a similar price 
  • or hand back the keys and try something else

The optional balloon payment is calculated by the finance company prior to the customer taking on the contract. This sum, known as the Guaranteed Future Value (GFV), calculates what the car will be worth at the end of the loan term, based on its depreciation and the miles you will put on the clock.

Pros

Monthly payments for PCP are lower than hire purchase (more on this later). 

If you decide not to buy the car at the end of the contract it is no longer your responsibility, unless you choose to keep it. If your car is worth more than the GFV, then you will have built up some equity towards your next deposit.

Umesh Samani, chairman of the Independent Motor Dealers Association, said: “The advantage of PCP is that you can just walk away at the end of the term. If the market is collapsing and the car is only worth £8,000, but your balloon payment is £10,000, you could say ‘happy days’ and give the keys back.”

With PCP, you can therefore change your car for a new one every few years without worrying about who will buy it.

Cons

Interest rates on these deals are usually hefty, so the amount you repay can often be vastly in excess of the car’s original list price.

If you want to buy the car you will need to pay your final balloon payment (the GFV). This could be a large sum, although you know what it will be from the outset.

You agree to a forecast mileage allowance (eg. 10,000 miles a year) at the beginning of your contract. Should you exceed it, excess mileage charges will kick in.

“A BMW I have here says the excess if you went over the agreed mileage would be 22p per mile, so it can be a big penalty,” Mr Samani said. 

On the other hand, you don’t want to overestimate your mileage, as you’ll be paying over the odds for miles you never drive.

If you decide to return the car at the end of the term you’ll need to foot the bill for the reconditioning charges to rectify any minor damage.

Example cost of Personal Contract Purchase

  • Cost of car: £25,000
  • Deposit: £2,500
  • Amount borrowed: £22,500
  • Monthly payment: £447 x 36
  • Assumed interest rate: 8.9pc
  • Optional balloon payment: £11,351
  • Overall cost: £29,944

*Based on MoneySuperMarket figures

Hire purchase

With hire purchase (HP), you pay off the entire value of the car in monthly installments following an initial, one-off deposit of around 10pc. 

The most important thing to understand is that it’s not your car until you’ve made the final payment. 

“HP is very straightforward – you’re paying the whole cost off over the term and you own the asset at the end,” Mr Samani said.

Pros

You don’t have the limited mileage that you get with PCP loans, and you can afford a car that’s beyond your available cash at the time of purchase.

Once the term is up and the monthly payments have ended, the car will be yours and you’ll have full ownership.

Thanks to this, there won’t be any reconditioning costs.

Cons

The monthly payments will be higher than with alternatives, such as PCP, because you’re paying off the full value of the car. 

You won’t own the car until you have made all of the repayments, and you’ll have to settle the outstanding finance if you want to sell the car earlier than planned, so there may be penalties for doing so.

You must ensure that the car is fully insured, properly maintained and in your possession until the full value is paid off. 

Example cost of Hire Purchase

  • Cost of car: £25,000
  • Deposit: £2,500
  • Amount borrowed: £22,500
  • Monthly payment: £759 x 36
  • Assumed interest rate: 8.9pc
  • Optional balloon payment: N/A
  • Overall cost: £29,832

*Based on MoneySuperMarket figures

What happens if I stop paying?

If you’re more than halfway through the loan period (i.e. you’ve paid off more than half the cost of the car on HP), then you can stop paying and the car will go back to the lender.

Drivers sometimes do this when they could get the equivalent car for a lower cost than they would by making the remaining payments. The car must be in good condition, so you might also have to pay for any outstanding repair work that needs doing.

If you’re not yet halfway through the payments then you will need to pay whatever will take you to half the amount you’ve borrowed, before you can get out of the agreement.

Cash buy

The most obvious way to buy a car is to simply pay upfront in cash.

Pros

You aren’t paying any interest and don’t need to worry about monthly installments. 

The car is yours straight away and you can sell it on as soon as you wish.

As a cash buyer, you may be able to negotiate a discount on the price.

Cons

Cars can drop in value as soon as they are driven off the showroom forecourt. This can lead to significant losses for those buying a new car every few years, whereas leased car drivers do not have this worry.

Used car values hit a rosy patch during and after the pandemic, but fell in the latter half of 2023. According to the AA, if you do 10,000 miles a year the average car will have lost around 60pc of its value by the end of its third year.

Example cost of buying a car with cash

  • Cost of car: £25,000
  • Deposit: n/a
  • Amount borrowed: n/a
  • Monthly payment: n/a
  • Assumed interest rate: n/a
  • Overall cost: £25,000



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