Car lease has become big business. A huge number of new and used car buyers in the UK are making their vehicle purchase on fund of some sort. It might be in the form of the bank loan, finance from the dealership, renting, credit card, the trusty ‘Bank associated with Mum & Dad’, or myriad other forms of finance, but fairly few people actually buy a car with their own cash anymore.
A generation ago, a private car buyer with, say, £8, 000 cash to spend would certainly usually have bought a car up to the associated with £8, 000. Today, that same £8, 000 is more likely to be utilized as a deposit on a car that could be worth many tens of thousands, then up to five years of monthly payments.
With various manufacturers and dealers claiming that anywhere between 40% and 87% of car purchases are today being made on finance associated with some sort, it is not surprising that there are many individuals jumping on the car finance bandwagon in order to profit from buyers’ desires to have the most recent, flashiest car available within their month-to-month cashflow limits.
The appeal of financing a car is very straightforward; you can buy an automobile which costs a lot more than you can afford up-front, but can (hopefully) manage in small monthly chunks of cash over a period of time. The problem along with car finance is that many buyers may realise that they usually end up spending far more than the face value of the car, and they don’t read the fine print of car lease agreements to understand the implications of what they’re signing up for.
For clarification, this author is neither pro- or anti-finance when buying a vehicle. What you must be wary of, however , would be the full implications of financing an automobile – not just when you buy the car, but over the full term from the finance and even afterwards. The industry is usually heavily regulated in the UK, but a regulator can’t make you read documents carefully or force you to create prudent car finance decisions.
Financing with the dealership
For many people, financing the car through the dealership where you are buying the car is extremely convenient. There are also often national provides and programs which can make financing the car through the dealer an attractive option.
This blog will focus on the two main forms of car finance offered by car dealers regarding private car buyers: the Hire Purchase (HP) and the Personal Contract Purchase (PCP), with a brief reference to a third, the Lease Purchase (LP). Leasing contracts will be discussed in another blog coming soon.
What is an Employ Purchase?
An HP is quite like a mortgage on your house; you pay out a deposit up-front and then spend the rest off over an decided period (usually 18-60 months). Once you have made your final payment, the vehicle is officially yours. This is the method that car finance has operated for many years, but is now starting to lose prefer against the PCP option below.
There are several benefits to a Hire Purchase. It is simple to understand (deposit plus an amount of fixed monthly payments), and the purchaser can choose the deposit and the phrase (number of payments) to suit their own needs. You can choose a term of up to five years (60 months), which is longer than most other finance options. You can usually cancel the contract at any time if your circumstances change with out massive penalties (although the amount due may be more than your car is worth early on in the agreement term). Usually you can be paying less in total with an HEWLETT PACKARD than a PCP if you plan to keep the car after the finance is paid off.
The main disadvantage of an HP compared to the PCP is higher monthly payments, meaning the value of the car you can usually afford is less.
An HP is normally best for buyers who; plan to maintain their cars for a long time (ie — longer than the finance term), have a large deposit, or want an easy car finance plan with no sting in the tail at the end of the agreement.
What exactly is Personal Contract Purchase?
A PCP is often given other names simply by manufacturer finance companies (eg – THE CAR Select, Volkswagen Solutions, Toyota Access, etc . ), and is very popular but more complicated than an HP. Many new car finance offers advertised these days are PCPs, and usually the dealer will try and push a person towards a PCP over a good HP because it is more likely to be better on their behalf.
Like the HP above, you pay out a deposit and have monthly payments over the term. However , the monthly payments are lower and/or the term is smaller (usually a max. of forty eight months), because you are not paying off the entire car. At the end of the term, there is nevertheless a large chunk of the finance past due. This is usually called a GMFV (Guaranteed Minimum Future Value). The car financing company guarantees that, within certain conditions, the car will be worth at least as much as the remaining finance owed. This provides you three options:
1) Provide the car back. You won’t get anything back, but you won’t have to pay out the remainder. This means that you have effectively been renting the car for the whole time.
2) Pay out the remaining amount owed (the GMFV) and keep the car. Given that this quantity could be many thousands of pounds, it is not usually a viable option for most people (which is why they were financing the car within the first place), which usually leads to…
3) Part-exchange the car for a new (or newer) one. The dealer may assess your car’s value plus take care of the finance payout.
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If your car is worth more than the GMFV, you can use the difference (equity) as a down payment on your next car.
The PCP is best suited for people who want a new or near-new car and fully intend to change it at the end of the agreement (or possibly even sooner). For a private buyer, it usually works out cheaper than a lease or contract hire financial product. You are not tied into returning to the same manufacturer or dealership for your next car, as any dealer can pay out the finance for the car and conclude the contract on your behalf. It is also good for buyers who want a more expensive car with a reduce cashflow than is usually possible with an HP.
The disadvantage of a PCP is it tends to lock you into a period of changing your car every few years to avoid a large payout at the end of the agreement (the GMFV). Borrowing money to spend the GMFV and keep the car usually gives you a monthly payment that is very little cheaper than starting again on a new PCP with a new car, so it nearly always sways the owner into replacing it with another car. For this reason, manufacturers and dealers love PCPs because it keeps you coming back each 3 years rather than keeping your car regarding 5-10 years!
What is a Lease Purchase?
An LP is a bit of a crossbreed between an HP and a PCP. You have a deposit and low monthly obligations like a PCP, with a large last payment at the end of the agreement. However , unlike a PCP, this last payment (often called a balloon) is not guaranteed. This means that if your car is worth less than the amount owing and also you want to sell/part-exchange it, you would need to pay out any difference (called adverse equity) before even thinking about spending a deposit on your next vehicle.
Read the fine print
What is absolutely essential for anyone purchasing a car on finance is to see the contract and consider it carefully just before signing anything. Plenty of people make the mistake of buying a car on finance and then end up being unable to make their monthly payments. Given that your finance period might last for the next five yrs, it is critical that you carefully consider what may happen in your life over those following five years. Many heavily-financed sports activities cars have had to be returned, usually with serious financial consequences for your owners, because of unexpected pregnancies!
As part of purchasing a car on finance, you should think about and discuss all of the various financing options available and make yourself aware of the advantages and cons of different car finance items to ensure you are making informed decisions regarding your money.
Stuart Masson is creator and owner of The Car Expert, a London-based independent and impartial car buying agency for anyone looking to buy a new or used car.
Originally through Australia, Stuart has had an interest for cars and the automotive industry for almost thirty years, and has spent the last seven years working in the automotive retail industry, both in Australia and in London.
Stuart has combined his extensive knowledge of all things car-related with his own experience of selling cars and delivering high levels of customer satisfaction to bring an unique and personal car buying agency to London. The Car Expert offers specific and tailored advice for anyone looking for a new or used car working in london.