What’s the best way to buy a new car?
For thousands of motorists, a brand new car direct from the showroom floor is the only thing that will do – credit crunch or no credit crunch. With one of the busiest seasons for new car sales upon us, many prospective buyers will be flocking to the forecourts.
Most new cars are sold at franchised dealerships, which means the process of buying a new car is pretty straightforward. In contrast to the downsides of used-car shopping, you choose the car with the specifications you want, and you can be sure that it doesn’t have any hidden problems.
Dealerships will also usually take your old car as a part-exchange and offer after-sales service. Buying a new car isn’t entirely without hassle, however. Unless you’re lucky enough to have the cash to pay for the car, you’ll have to work out the best way to finance your purchase.
Dealerships offer a variety of options or you can go it alone and arrange your own finance. Each deal will vary in terms of repayments, overall cost and flexibility, so what’s the right road for you to go down?
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Without a doubt, cash is the most straightforward way to pay for your new car. With no interest to pay on loans, it’s also the cheapest.
However, if you have the money upfront, it pays to remember that dealerships make money from selling finance packages. The golden rule for cash buyers therefore is to let the dealer think you’re considering finance until you’ve agreed a price for the car, and then show your hand.
If you don’t have the cash - the dealership will come to your aid with a variety of options.
With a hire purchase agreement, you will pay a deposit of at least 10% and then repay the balance, plus interest, in monthly instalments over one to five years. One benefit with this option is that, if anything goes wrong during the loan term, the lender is jointly responsible with the dealer for fixing the problem. And if you don’t want to keep the car, you can sell it back to the dealer at the end of the term.
However, it’s important to note that you will not own the car or be able to sell it until all payments are made and, if you do not keep up with payments, the car can be repossessed. There is usually an administration fee with the first payment and an ‘option to purchase’ fee with the last one, but, with a bit of haggling, you can often get these waived.
Personal contract plan
If you want to keep your repayments low and change your car every two to three years, a PCP plan could be right up your street. After paying a deposit of around 10% and agreeing on annual mileage, the dealer will set a guaranteed future value for your new motor. In the same way as a hire purchase agreement, you’ll make monthly payments and not own the car outright.
However, as a substantial chunk of the payment is deferred until the end of the period, this is not factored into the cost of your instalments, so monthly payments will often be lower than with hire purchase.
At the end of the PCP term, you can choose to pay off the remaining value and keep the car, hand it back to the dealer and walk away, or use the car as a deposit on a newer model. But be aware that you’ll be charged around 10p for every mile above the annual mileage estimate, and the car has to be in good working order when you return it, because any damage will be charged to you.
"We find our PCP products are popular because at the end of a typical two or three-year repayment term, customers have the flexibility to either return the car, upgrade it, or keep it," says Louise Dawson, marketing manager at BMW Financial Services. "If they chose to part-exchange their car for a new model at the end of the agreement, they can save money on MOT and servicing costs and are less likely to have to make repairs."
For this option, you also agree the annual mileage, and the car’s guaranteed future value is deferred until the end of the agreement. Once the contract ends, you will be responsible for making a final payment. Lease purchase repayment periods are typically taken over two to four years and you can settle the balance at any stage.
If you want the pleasure of driving a new car regularly but don’t want the responsibility of owning it or suffering the effects of depreciation, it could be worth opting for contract hire. You choose the vehicle you want, how long you want it for and the annual mileage you expect to do.
These factors influence your monthly payment, which can vary from £100 to £400 a month, with the option for your payments to include maintenance.
Once the contract ends, you hand back the car and walk away. Unfortunately, you will have to pay a few months’ rental in advance, and take out comprehensive insurance, which can be costly for expensive cars.
While dealer packages may offer low repayments and a degree of flexibility for those that like to update their car regularly, they can be expensive in the long run. It’s important to understand how they work and how much they’ll cost you.
The easiest way to compare offers is to ask what the APR on the finance is, or better still, what the total repayments, including any charges, will be.
A canny salesman may boast a lower ‘flat rate’ but this will apply to the total sum borrowed over the term of the agreement, and won’t take into account the fact that the money you owe decreases over time.
It’s worth noting that dealers can be flexible, so try to negotiate a lower APR. A percentage point may not seem like much but it could save you hundreds of pounds.
A good personal loan is likely to be cheaper than car finance from your dealer. For those with a squeaky clean credit record, personal loans of £25,000 payable over one to seven years - in some cases 10 - are an option. Repayments will be lower if you opt for a longer term, but you will pay less interest in total with higher repayments and a shorter term.
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Take the example of a £20,000 loan with a typical rate of 7.9%. Over seven years, repayments would be £308.02 a month and the total cost of borrowing would be £25,873.68. However, payments of £401.97 a month reduce the term to five years, saving £1,755.48 in interest and bringing the total cost to £24,118.20.
Cut the term to three years and, while repayments jump to £623.29, you’ll see the overall cost fall to £22,438.44. Also, if you opt for a shorter term, you’ll benefit from a greater choice of loans and lower rates.
While personal loans are cheap, Samantha Owens, head of cards and personal loans at Moneyfacts, warns that there are factors you’ll need to consider.
"Although you will own the car from day one, if you default on the loan repayments, the lender can still seek payment of the outstanding sum and this could possibly result in court proceedings," she explains.
"Most loans over a year will come with a redemption penalty so, if you plan to pay off the loan early, you’ll have to pay an additional month’s interest on top of the sum borrowed, as well as interest on the outstanding month."
Whatever car you’ve got your heart set on, it’s important to weigh up your options and remember that, however pushy the salesman, you can always make your own arrangements. If you are considering dealer finance, insist on written quotes to take away and think about. The right finance package will depend on how much you’re willing to pay each month, how many miles you plan to cover and how much depreciation you can tolerate.
While there’s nothing quite like driving a new car off the forecourt, getting the choice of finance wrong could be an accident waiting to happen.
If you want to escape from a special mortgage deal within a specified timeframe, which often extends beyond the deal ending, the lender will levy redemption penalties. The early redemption penalty might be several months’ interest or a percentage of your loan. Either way, it could cost you several thousand pounds and is the mortgage lender’s way of making you stay put after the initial low interest rate period has ended paying an above-average rate.
Hire purchase agreement
A hire purchase or ‘conditional sale’ agreement is generally used for buying cars or furniture whereby the debt of the goods belongs to the organisation they were bought from (the creditor) until such a time as the debt is paid off. Only then do they belong to the purchaser. Not to be confused with an ordinary credit agreement. With an HP agreement you can’t sell the goods until the debt is repaid. If repayments are missed, creditors can demand the return of the goods or can repossess them. However, if more than a third of the total debt has been repaid, creditors have to pursue payment through the county courts first. With an ordinary credit agreement the buyer owns the goods (and can sell them) and a creditor can demand repayment of the debt but has no legal right to repossess the goods.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.