Financing a new car: which way is best for you?
There’s plenty to consider when buying a new car. We look at the alternatives to paying with hard cash
It’s not breaking news that ever more private buyers are funding their new car purchase through some form of finance. But what may surprise you is that, according to the Finance & Leasing Association (FLA), a whopping 93.2% of private new cars sales were financed by its members in the 12 months to June 2021, with buyers taking advantage of the multitude of packages available across the market.
If you are likely to be one of them, then it’s vital to research the market first to make sure that, whichever product you choose to help put a new car on your drive, it is right-sized for the job. There’s no point in making a long-term financial commitment to buying a new car, for example, if you predict that your motoring needs may change in the next year, meaning an early – and potentially expensive – exit from a contract.
*Flexible finance as a hedge against rapidly changing technology*
Even if you are among the small minority of buyers who still prefer to pay for a new car with hard cash, it’s still worth considering the finance path. The technology underpinning today’s new cars – especially EVs - is changing more rapidly than at any other time in the past century, so having the flexibility to upgrade your car with minimal financial pain may be preferable to suffering steep depreciation on a car which, even after four years, could be hard to sell on.
*Six of the best *
What we have below are six alternatives to walking into a car dealership with a briefcase full of cash (which would probably not be accepted anyway). To provide some context, where appropriate, we’ve used one of our favourite SUVs, the Volvo XC40, in popular 1.5 T3 R-Design Auto spec as our example new car. You’d also need a chunky briefcase to carry its £34,430 on-the-road purchase price in cash.
As with Autocar’s road test data, we’ve also assumed that you typically travel 12,000 miles per year, have 10% of the list price to put down as a deposit, and are happy to fund the finance over three years.
*Personal contract purchase (PCP) *
With a PCP, you are essentially renting a car, with the option to purchase it outright at the end of the contract. You will normally be asked for a 10% deposit up front, followed by monthly payments over an agreed term (three years in our example, below).
What sets a PCP apart from other types of finance is the guaranteed minimum future value (GMFV), which is set by the lender. This keeps instalments relatively low, because you’re only paying for the difference between the car’s purchase price and its predicted value at the end of the contract (although you will still pay interest on the car’s full value).
It’s a good solution if you like changing your car regularly, but be mindful of over-inflated GMFVs that may not reach parity with market values come the end of the agreement.
Personal contract purchase advantages
· Low monthly payments and initial deposit.
· Option to hand the car back at the end of the agreement with no depreciation worries.
Personal contract purchase disadvantages
· Interest rates can be higher than normal.
· Excess mileage charges can prove expensive.
· Artificially low monthly payments can result in unaffordable GMVF, or balloon payment.
Example: Volvo XC40 1.5 T3 R-Design Auto (36-month term, 12,000 annual mileage)
Deposit £3443.00
36 monthly payments of £496.01
1 optional final payment of £17,447.63
Annual percentage rate 5.9%
Guaranteed future value £17,447.63*
Total amount payable £38,746.99
*Excess mileage charged at 14.9 pence per mile
*Personal contract hire (PCH)*
If you want greater predictability with your motoring costs, and care less about owning a car, then PCH could be for you. You choose a specified period over which the agreement is to run, and then effectively rent the car during that term. You can even pay extra and build in a maintenance package, which will cover things such as servicing, tyres and VED (vehicle excise duty, or road tax*). There’s no option to purchase the car, and when all the payments have been made, you simply hand it back to the dealer.
*Not included in our example
Personal contract hire advantages
· Costs are predictable, especially with added maintenance package.
· No worries about the future value of the car.
Personal contract hire disadvantages
· You never own the car.
· Relatively high up-front initial rental.
· Penalties for excess mileage and above-average wear and tear.
Example: Volvo XC40 1.5 T3 R-Design Auto (36-month term, 12,000 annual mileage)
Initial rental (inc VAT) £3443.00
35 monthly rental payments of £472.21
*Hire purchase (HP)*
A more traditional method of finance, and one in which it is easier for buyers to be accepted, is hire purchase. Like a personal loan, the finance covers the full cost of the car, and you pay it back in fixed monthly instalments over an agreed period. However, a deposit will normally be required, and you will not own the car until all the payments have been made. You can extract yourself from an HP agreement by handing back the car, but only after 50% of the loan has been repaid.
Hire purchase advantages
· Car belongs to you once all payments have been made.
· Excess mileage charges do not normally apply.
· Low deposit.
Hire purchase disadvantages
· Interest rates tend to be higher.
· You can’t sell your car without permission from the lender.
· Missing a payment could result in repossession of your car.
Example: Volvo XC40 1.5 T3 R-Design Auto (36-month term)
Deposit (10%) £3443.00
36 monthly payments of £939.13
Annual percentage rate 5.9%
Total amount payable £37,251.68
*Car subscription*
Still relatively new in the UK market, and with variation among manufacturers’ schemes, a subscription takes elements of the PCH (personal contract hire), but gives it a more flexible twist. With Care by Volvo Flexible, for example, and shown below, the agreement covers the hire of a car, but with the option to walk away from the contract with three months’ notice. New customers also have a 30-day trial period at the start, during which they can hand the car back.
Apart from fuel and insurance, all running costs are covered, as is a reasonable level of wear and tear, and customers can opt for a particular mileage package, starting with the basic 6000 miles per year. (Again, our example is based on an annual mileage of 12,000.)
Since Care by Volvo is a rolling three-month contract, customers also have the option of swapping into a new/different model after that period, or simply retaining their existing car.
Car subscription advantages
· All running costs covered, save for fuel and insurance.
· Flexibility of withdrawing from contract with three months’ notice.
· Low deposit.
Car subscription disadvantages
· You never own the car,
· Penalties for excess mileage and above-average wear and tear.
Example: Volvo XC40 1.5 T3 R-Design Auto (rolling 3-month contract, 12,000 annual mileage)
Monthly charge £589.00
Mileage surcharge/month £40.00
Total monthly payment £629.00*
Deposit (1 monthly payment) £629.00
*Minimum 3-month rolling contract
*Personal Loan *
Taking out a personal loan to cover some or all of the cost of a new car is one of the most straightforward methods of finance. You choose the lender, the best rate of interest available, and the period over which you’d like to repay the loan. You then effectively become a ‘cash buyer’, and the car belongs to you immediately, with no limits to how long you keep it, use it, or even modify it (although your insurers will need to know if you’re planning any upgrades).
Personal loan advantages
· You own the car from the start.
· No limits on usage.
Personal Loan disadvantages
· No protection against depreciation.
· Interest rates will vary according to your credit status.
*Credit card *
Some buyers may be able to use their credit card to purchase a new car outright, although many will not have a credit limit generous to do this, and even if they do, the selling dealer may not accept credit cards for all or part of the purchase price.
However, if you are able to use a credit card, and you can time the purchase immediately after your last statement date, then you could benefit from up to six weeks’ interest-free credit – possibly longer, if there are promotions available – provided you settle the balance in full when it falls due. If you don’t, interest can build rapidly, and the rates are a lot higher than with most other forms of finance.
You will, though, receive consumer protection for up to £30,000 if the car you’ve purchased is not of merchantable quality, or has been misrepresented by the selling retailer.
Credit card advantages
· Up to six weeks’ interest-free credit (or longer with promotions).
· Simplifies the buying process and avoids credit checks.
· Consumer protection up to £30,000,
Credit card disadvantages
· Not all dealers will accept credit cards.
· Your credit limit may not cover the purchase price.
· Punitive interest rates if you don’t settle full balance by the due date.
*Simon Hucknall*
*READ MORE*
*UK car finance tightened to become 'fairer' for customers*
*The secret way to escape your PCP agreement*
*Hyundai offers monthly subscription deal for electrified models*
