The Best Way to Finance a New Car

Many Brits are turning their back on purchasing a car, with a sharp decrease in the number of people planning to buy one.

Though finance deals and borrowing rates are easier on one’s pocket than before, only fewer individuals are turning to credit to finance four wheelers, according to some experts.

As per the study commissioned by professionals, around 45% of individuals have ‘no immediate plans’ of purchasing a new car. Also, those who were planning to purchase were likely to employ their savings instead of resorting to credit.

Experts say that this a huge swing as just over a third are using their savings, which perhaps reflects low returns on savings. Not to mention, the reluctance to choose credit deals can also be associated to the ever-increasing mistrust of motor finance deals.

According to a mystery shopping exercise, it was found that consumers were regularly rejected written quotations and weren’t given any apparent information regarding the interest rates, whilst main charges and fees were omitted.

Experts of the consumer group also said that various types of payment schemes could probably have baffling names and in their investigation, it was found that dealers weren’t being comprehensible regarding the fees and rates, thereby making it even more difficult for individuals to know whether they were being offered the best deal.

However, other studies had a completely different story to tell. They revealed that both dealers and manufacturers were reluctant to disclose the expense of their finance packages.

Even some of Britain’s largest dealer networks refused to talk about the rate of interest on finance deals, claiming it is something between the dealer and their customer.

This is surprising given the interest rates were generally on the lower side, with manufacturer finance and personal loan being as affordable as 5%.

The research also shows that numerous purchasers who’ll fund their car with the help of a loan has halved to 1 in 10, with the number of people choosing to employ a car dealer finance dropping to 14%.

Put simply, there has barely been a better time to negotiate the best deal either on finance or price. So, what could possibly be the best funding options if you fancy a sparkling new car the next month and how do you compare that?

Here are some options that you can choose, if you’re willing to purchase a brand new car for yourself:

  • Personal Loans

Now, you can take out a loan at the lowest level it has been for over a decade. Several lenders offer personal loan deals at an affordable rate.

For example, if loan is being offered at the rate of 5%, then a £12,000 credit for over 5 years could mean a monthly repayment of £226 and the sum total repayment would be of £13,550. But, if the interest rate is slightly higher – that is, of 5.4% – then the monthly repayment would be pushed up to £228 and the sum total to be repaid would be £13,676.

There are numerous finance deals, which are available online, where one can get an immediate response for their loan application.

Experts say that every borrower is assessed individually based on their credit history, so not everyone would receive the rates as quoted by the lender.

Bear in mind, you ought to ask for annual percentage rates (APRs), as chances are there might be hidden fees and charges which aren’t made clear at the beginning. But, all the charges and fees must be contained in the APR.

Sadly, most of the loan companies aren’t obliged to disclose APR, unless they’re asked for it. If not, they might try to palm you off with flat rates, which could possibly be half the actual APR, which is why it’d look deceptively attractive.

Besides APR, you must also look out for Payment Protection Insurance (PPI). This is a type of policy which is not only given alongside personal loans, but also with credit cards, car finance, etc.

So, ensure you’re going through the loan agreement thoroughly. If you or someone you know has been mis-sold the policy, then it’s crucial to claim for PPI refund immediately.

Different banks have different criteria when it comes to assessing an individual’s creditworthiness, which is why it’s crucial to get more than one quote.

  • Manufacturer Finance

One of the criticisms imposed on dealer and manufacturer finance is that the offers provided by them is intricate, not easy to comprehend and moreover impossible to compare with others.

But, when you put in the required time, do the necessary research and negotiate hard, you could find an attractive finance deal. Most manufacturers offer a wide range of options right from hire purchase to leasing.

Say for instance a car manufacturer has what they call an ‘options package’, giving people the liberty to chop up and change as they go along. People can start by paying interest on a two-year basis at a lower rate of interest on specific cars.

One can give the car back at the end of the two-year term or else simply make a payment and retain the car for themselves.

Most car manufacturers say that it’s crucial to bear in mind that everything could be negotiated right from the price to the interest on the financing. So, one must never accept the very first offer.

There are offers made to the customers, which are based on low mileage. Put simply, it means that the interest rate that you’ll pay would be on the basis of your car mileage and predicted wear and tear.

If you’re surpassing the estimated mileage or breaking the wear and tear contract, then you could perhaps expect financial penalties.

Leasing could be another option for certain people. Of course, leasing a car could be a bit more expensive, but not every time. Not every individual is willing to own a car. There are some people who have a fixed monthly budget for motoring and that’s what they’d wish to spend.

New cars start depreciating swiftly once they’re driven off the forecourt. Nevertheless, they do come with better warranties as well as repair packages.

  • Dealer Finance

Usually, most dealers can offer leasing agreements, but at the same time they’ll also have a personal loan tie-up with banks and other financial institutions.

The interest rate is fixed as per the purchaser, the car and on the basis of the overall package as negotiated between the customer and dealer. For example, one particular dealer could provide loans varying between zero interest rate and an APR of 10%, which would be completely based on the choices made by the borrower.

Most of the dealers say that whenever it comes to selecting between a finance house arrangement and manufacturer, it comes down to whether the person would actually want to purchase and own a car. In that case, a personal loan arrangement would be the best. But, there are many people who might be happy with a leasing option.

  • Personal Contract Purchase (PCP)

A Personal Contract Purchase has soared in popularity, as you have to a pay a deposit and then a set number of monthly repayments, which is usually over 2 to 4 years.

By the end of PCP, you can either hand over the car and walk away, or pay a lump sum amount to buy the car outright, or part exchange the car for a brand new one by employing any of the equity.

PCP schemes usually tend to offer you lower monthly payments in comparison to a hire purchase plan or personal loans. Yet, you never really own the car, unless and until the final lump sum amount is paid by you.

The “guaranteed final payment” is an estimated value of the car when your PCP plan comes to an end. This value is calculated by using your premeditated mileage figure, which once set cannot be changed. So, it’s crucial to think about the miles.

You need to be as precise as possible with the estimated mileage. If it’s too low, then you’ll be charged around 10p/mile by the end of the term. On the other hand, if you aim to high, then you’ll unnecessarily raise your monthly repayments.

PCP schemes could be the best option, if you wish to change the car in every 2 to 3 years, since you have the choice to hand over the car, stay away from MOT, and more importantly service and repair expenses, which often start to crop up after first 3 years.

Nevertheless, if your plan is to keep the car, then you’ll have to do some cold hard maths to confirm whether any incentive or discount from the dealership is really worthwhile.

  • Hire Purchase Plan

With hire purchase plan, you can pay a deposit amount and spread the rest of the car expense over a fixed period, which is usually 2 to 5 years. You do not really own the car outright, unless the final payment is made by you. But, during this period the manufacturer is equally responsible for fixing problems, if any.

Buying a car through a hire purchase plan could often be done by little upfront money (the deposit is usually paid by the retailer), which make it an attractive option, especially if you wish to spread the expense and do not have any access to affordable credit.

However, your monthly repayments will be higher in comparison to the PCP scheme. Put simply, it means you might be unable to meet the expense of an expensive car as you would if you took a PCP.

The main cost of a hire purchase plan is fixed by the rate of interest, which is charged on the remaining balance, and is usually higher for contracts with little or no cash deposit.

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