Car Finance: A Guide Comments26 Comments

car-finance

In this day and age, you are very lucky if you are able to purchase a car outright when looking for a new vehicle. For the majority of us, we will enter a car dealership knowing that we will have to come to some arrangement regarding car finance.

Borrowing money to pay for a new or used car can sound quite daunting, but car finance is designed to make the purchasing process as easy and as manageable as possible by splitting the payments up over 12 months or more. The biggest question when it comes to car finance is: Which finance package is best for me?

Personal loan

This is a very popular choice when it comes to car finance, as it is relatively straightforward, as long as you have a positive credit background. Many companies can offer you personal loans when it comes to car finance, which include banks and online lenders.

A personal loan has the main benefit of not having to place a deposit on your chosen car and instead you pay the dealer the full amount after attaining the loan, then pay back the lender over a set number of months. When considering a personal loan, take a good look at the interest rates that will apply to your repayments; this interest will place a cost upon your loan payments for each year you’re paying the money back – obviously the lower this rate is, the less the cost is.

Another important factor is whether you get an unsecured or a secured loan. Most will go for the unsecured loan as it is only tested against your credit rating, whilst a secured loan requires some sort of collateral which is usually your house.

Hire purchase

Usually referred to as HP, this form of car finance is a quick way to get credit for your new vehicle when going through a dealership such as Stoneacre. With HP, you will almost always require a deposit, which is usually about 10 per cent of the car’s value, but if you are part exchanging your old car, then this can be used to cover the deposit cost if the vehicle is worth enough.

There is less risk involved when it comes to HP, as credit is secured only against the car, which when paying through HP, you won’t own until the final payment is made. However, a rate of interest still applies, and you will find that this rate will be higher on used cars compared to new vehicles as these will not be backed by the manufacturer.

You will pay off the car, less the deposit, over a set number of months; the more months you pay it off the lower the payments are, but you will incur more interest costs.

Personal contract plan

A personal contract plan – or PCP – is very similar to HP in that you place a deposit and pay the invoice value back over several months then pay the rest in a final lump sum. However, the difference with PCP is that the final payment is completely optional to you as a customer.

If you don’t want to keep the car come the end of the agreement, you can not pay the final payment and either hand the car back to the dealer or trade it in for a new model and start the cycle from the beginning, but with a brand new car. It is a great method of paying for a car if you’re after flexibility because you know you’ll want a new car every three years, plus the process means monthly payments are low, depreciation doesn’t enter the frame and the bulk of the cost comes with the optional final payment at the end of the agreement.

One downside to PCP, however, is that you have to stick to a restricted yearly mileage set at the beginning of the deal. Extra costs will be incurred if you go over the agreed amount, usually at a certain price per additional mile.

So there you have it, now all you have to decide is which is the best car finance package for you.

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This entry was posted in Financial Advice, and tagged , , Comments26 Comments
By : Adam | 1 Oct 2013
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26 thoughts on “Car Finance: A Guide

  1. Jake

    I don’t think people who pay cash for a car are “very lucky”, they just worked very hard to be able to. Plus, we don’t all need $15k cars. A $2k car will most likely do the trick. It won’t look as nice, but it’ll get you from point A to point B which is the job of a car. Personally, I don’t think I’ll ever finance a car unless I can get a 0% interest rate. I just don’t want to have to deal with paying interest and having a constant monthly payment.

    Reply
    1. Jeremy Biberdorf

      The problem is that not every $2k car will actually get you from point A to point B. A lot of cars in that price range have mechanical problems that result in a low price. So by buying that cheap you risk unreliability. I personally have no problem financing a car. Even if it’s higher than 0% interest, you can often get financing rates that are much lower than you’d earn by investing that money.

      Reply
      1. Greg Fowler

        Hi Jeremy,

        I would have to disagree with you on this one. There are many reliable cheap cars on the market for less than 4K or even as low as 2K as mentioned. The issue with cars is more mental than anything and anyone can take advantage of it. For example, many drivers will opt get a new car just for the purpose of “keeping up with the Jones” and with the reliability of vehicle today you, I, or anyone can take advantage of it and find a pretty reliable car at a very modest price.

        Reply
  2. Done by Forty

    If you can afford a monthly car loan payment, you can, by deduction, afford to save for the car. In fact, if money is tight, interest on car payments is only going to make it tighter.

    I’d hesitate to point anyone towards financing a depreciating asset like a car unless it’s an absolute necessity to continue commuting to work.

    Reply
    1. Jeremy Biberdorf

      I don’t agree with that deduction. Saving the money to finance a car often means having no car for a long stretch of time. By trying to save up enough cash you are also letting that cash sit in a bank account losing money to inflation and earning minimal interest. So that should be considered too.

      Reply
  3. MoneyAhoy

    I’m with the above commenters. Cash for used cars is the only way to go if you want to get rich! Read the commentluv for a post on how I just got a new used car for free :-)

    Reply
    1. Jeremy Biberdorf

      I’d think a lot of wealthy people would disagree. Sure many of them don’t drive fancy cars, but they aren’t all shelling out cash to buy their cars. They’d instead have the credit to get a low financing rate and let their money work for them in investments.

      Reply
  4. Demaish @ Borrowed Cents

    I have financed a car before and I don’t think I will ever do it again. I might never drive a 20k car but my 4k cash money car is still going to take me around.

    Reply
  5. Micro

    I think if you are going for your first car, it’s okay to finance. You don’t need to go crazy and get the 15k car but you want to make sure its reliable. Paying cash for a car doesn’t help you if you are pumping money into the car every other month for maintenance. Afterwards though, you should be able to put away money every month to pay for the car outright.

    Reply
    1. Jeremy Biberdorf

      Good point about needing to avoid a car that is just going to suck away money for repairs and maintenance. I don’t get why all of the commenters are so insistent on paying cash for cars though. I would rather have my cash work for me and pay lower rates on a car loan than what investments return.

      Reply
    1. Jeremy Biberdorf

      Yes, you definitely want to shop around for a good financing rate if you do choose to go that route. That can play a big role in whether it makes more sense to finance of pay with cash.

      Reply
  6. Bryce @ Save and Conquer

    I bought fairly inexpensive motorcycles when I was young. My first one cost $250 back in 1972. I eventually bought a pickup truck when I finished college. I had saved before and during college, and paid $6,000 cash out the door in 1985. I drove that truck into the ground with 265k miles, and bought a replacement truck in 2000 for cash. It is less than half way through it’s life with a little over 100k on the odometer. Anyway, start a car savings fund now, when you don’t need one, and you will have money to buy one without using credit when you do need one.

    Reply
    1. Jeremy Biberdorf

      I do like the strategy of gradually working your way up to vehicles you can reasonably afford. I just can’t buy the concept of saving up cash when your money can work for you instead.

      Reply
  7. Sam

    I see the point of those who say a person should save for a car, but at the same time, you never know when you’ll need one and it can take a fair few months – if not years – to save for a solid car.

    Getting finance has pretty much the same effect on your bank account as putting money away if you ask me, you’re still having to take a sizable chunk from your income each month. Plus, I’ve seen plenty of 0% finance opportunities, and you’re getting the car straight away.

    Reply
  8. Skint in the City

    I took a finance plan on my first car – never again. remember that saying ‘leased equals fleeced’? Save then buy is my way – then run it into the ground! But I understand it’s not always possible to pay cash when you want a fancy car – I go for runarounds that don’t cost so much.
    Car clubs are a great alternative too I find.

    Reply
    1. Jeremy Biberdorf

      Yes for some people a car club can be a solid choice. Not everyone needs a car for everyday use. If I didn’t already own a car, I’d seriously consider that option. I’d disagree with running a car into the ground though. I’d think there is a point where you should sell a car before the maintenance starts getting too expensive.

      Reply
  9. Tara @ Streets Ahead Living

    I against buying a new car but if you have the cash to pay for something and are offered a very low interest loan to cover the cost of the car you’re buying, you’re better off saving the cash or investing it and using the loan to get the car. By low interest I mean anything close to the inflation rate, like 2.5% or below.

    Reply
    1. Jeremy Biberdorf

      Finally someone on the same page as me. Seems to me that most finance bloggers have this fear or using credit and paying interest. They somehow overlook the benefits of using cash for investments instead and taking advantage of credit.

      Reply
      1. Taylor @ Motive

        Tara/Jeremy: I’m in agreement as well. I never really thought I would finance or lease a car, but right now I’m considering it because I could secure such a low APR rate, and I like the idea of keeping all that cash in the bank or invested in some way. I know Grayson over at DebtRoundup has expressed much the same thing.

        Reply

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