It’s important to consider how you will pay for a new car if you’re going to buy one. Many options are available, but you need to know all the options before making any decisions.
Although many people go with the financing options recommended by their dealers, we recommend shopping around so you can be sure you are getting the best deal possible.
When making a decision about how to pay for your car, you must consider monthly installments, interest rates, and additional payments, just like you consider running, maintenance, and insurance costs when choosing your car.
The first thing you need to do is understand when and how you’ll pay, what the pros and cons of each potential option are, and whether there are other options you could choose that are cheaper than what you’re considering. The following is a list of some of the most popular ways to buy a car – but always make sure that you pick the one that best suits your needs.
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Preferred Purchase Agreement (PPA)
A popular method of car finance is Personal Contract Purchase (PCP). Unlike other options, PCP deals do not require you to repay the full value of the car, so your monthly repayments could be lower.
The guaranteed future value (GFV) or balloon payment, and what is known as the ‘option to purchase’ fee, must be paid at the end of the finance term if you would like to own the vehicle. The car can also be returned. The vehicle value offset by the finance lender to the end of the term is the GFV or balloon payment. It is based on the anticipated mileage and age of the vehicle.
Buy-Side Acquisition (HP)
In a hire purchase, you hire the car for an agreed amount of time and pay monthly installments. The car will be registered to you, but it won’t belong to you until your final payment and an ‘option to purchase’ fee is paid.
You generally have to pay a deposit – usually at least 10% – and repay the rest over a specified period of time as a fixed monthly payment.
Positives:
- As opposed to PCP, you don’t have to adhere to the agreed mileage
- With no balloon payment at the end, you don’t have to fork out a lot of cash to keep your vehicle
Negatives:
- A PCP deal usually has higher monthly payments
- A deposit is likely to be required in PCP as well
- You could lose your vehicle if you fall behind on your payments, just like with PCP.
A Personal Contract for Renting a Room (PCH)
It is essentially long-term renting. Personal Contract Hire is also known as leasing. When your contract ends, you are not given the option to keep the car, such as with PCP or HP.
There are often maintenance costs included, but you may need to deposit a substantial amount upfront that you will not receive back. You can also include the payment for your insurance, MOT, and tax, which makes things simpler but may result in a higher monthly repayment.
Is it possible For Me To Afford Car Financing?
Before signing on the dotted line, you must be satisfied with this consideration. If you are planning on taking out a loan, ensure that it is affordable for you, and that you can still afford your other existing obligations and essentials, such as your mortgage and bills. Take into account the possibility that your financial situation may change in the future and whether you will be able to repay the loan then.
You can get help from Citizens Advice if you’re worried you might be in financial difficulty – they will be able to advise you depending on your situation.
