Car Finance Car Leasing

Financing your next car

The UK new car market has increased and is set for steep growth with many fuelled primarily by finance deals.  Consumer organisation Which? suggests that 75% of new car purchases are financed in this way.  But what are the different options and where do you go?

Below we explain the car finance and car leasing options…..

Leasing/Personal Contract Hire

Leasing a car is a method of paying for the use of a car or van over a specified period of time.  Not to be confused with car hire which is short term.

You have fixed monthly costs with the option of maintenance to be included.  You won’t end up owning the car, but the majority of customers replace it after the term with another new one.

Typically the cars that hold their value such as illustrated below, become much more affordable by choosing this option.  Lease companies assess the monthly payments based on the original worth of the vehicle compared to the resale value at the end of the term.  This is why some of the more aspirational vehicles become more affordable.

Other factors to consider are fuel efficiency and road tax as the more economical, the slower the depreciation.  There is strong evidence that certain manufacturers hold their value better than others, but this does change over time, so it’s important to do your research before you commit.

This is a great option for those who like to be in a new car and perhaps purchase one they otherwise wouldn’t be able to.

Contract Hire – Business

Contract Hire can be a cost effective for businesses wishing to run new cars.  The monthly rentals are fixed for the term of the contract and include Road Fund License. For VAT registered companies, a portion of the VAT may be reclaimed. The vehicle is handed back at the end of the contract.  This is funded ‘off balance sheet’ and therefore they are also very tax efficient.

Hire Purchase

This is a way of purchasing your car over an agreed period of time including a deposit.

The costs are fixed so easy for budgeting and there is no ‘balloon’ payment at the end.  There are no mileage restrictions.

The loan is secured against the car, so you don’t own it until the final payment.  The downside to this is that if you don’t make a payment, the car may be taken away.  Remember to read the small print!  This is the most expensive monthly option.

Personal Contract Purchase (PCP)

Ideal for drivers preferring the high value cars with the option to purchase their vehicle, but who don’t want any depreciation risks.  It is a ‘conditional sale agreement’ with the driver contracting to purchase the vehicle over a set period of time.  It is unlikely to include full maintenance and has a final balloon payment at the end of the period.

This usually comes with a low deposit, no mileage restrictions, and it allows you to own the vehicle (although most opt to return the car to the finance company).

Bank Loan

A simple way paying for your car up front and agreeing monthly repayments over the same period.  Interest rates vary enormously, so it is worth shopping around for the best deal for you.

Remember with any payment up front, you are bearing the brunt of the depreciation and a loan will be dependent on a successful credit check.  This option also shuts down a credit line for you, so that should you face a need, another loan may not be supported.

Pay Cash

There’s no monthly payments to worry about, but you do need to balance this with receiving interest on savings, or the interest gained by investing into an appreciating asset.  If new, you also bear the brunt of the depreciation.

Summary

Finance can be confusing, so it is important to talk to someone who knows how to advise you properly.  Below is a useful grid supplied by Leaseline Hertfordshire, based in Redbourn (www.leaseline-hertfordshire.co.uk).

With any finance or warranty package be clear on what it does and, most importantly, doesn’t cover.  Things to watch out for are below:

Gap Insurance – should your car be stolen or written-off, this insurance covers the difference in cost between what the insurance company will pay and the outstanding liability under the terms of the lease.  It’s not an essential purchase, but does give peace of mind.

Annual Mileage – Understand your own mileage before agreeing to a contract.  You have the option to set the allowable mileage to your needs and this can be renegotiated if you discover your mileage is higher/lower.  This will impact your monthly payments, but not as much as a penalty at the end of your contract.  Contrary to popular belief, there is no minimum or maximum, just keeping within the planned mileage you set or renegotiate.

Maintain the Car – if damage to the car goes beyond wear and tear when it is returned, the consumer can expect to pay a premium for putting it right.  The cheapest way, is to get it repaired before it goes back to avoid them assessing the value to the damage.  Redbourn Auto Solutions will check the vehicle before its return and recommend any repairs that are essential to the value of the car.

Depreciation

Let’s be clear on depreciation….  ALL cars depreciate whether new, used or nearly-new!  90% of the cars surveyed depreciated by the same rate whether new or nearly new.  The difference is primarily between different brands, although you should also take into consideration the model and colour!

If you are after a used car, these still depreciate, but it feels less of a burden because of the amount of finance involved.

If you are purchasing a car to last you the next 10 years, then why not consider the car you actually want?!  The important thing when leasing is to set your monthly budget and then source a car to that budget.  You may be surprised as to what this will get you.

Where to go for help?

If you are looking for a lease option make sure the company are a BVRLA member.  The British Vehicle Rental and Leasing Association is the trade body for the vehicle rental and leasing sector.  They ensure members maintain industry standards.

For new, used or nearly new vehicles, look for consumer standards such as Trading Standards ‘Buy with Confidence’, Which?, or industry regulators such as RMI (Retail Motor Industry) or Motor Codes.  These ensure that the garage is governed by some stringent operating guidelines.

Before you go into a dealership to discuss your new purchase, be clear on the parameters you are working within such as; Type of car, budget, mileage, etc. Then let the professionals give you the options and you can then choose the one that is right for your circumstance.