What's the cheapest way to pay for a new car?
With the new '60' registration plates due out this week, car dealerships across the country will be teeming with eager motorists looking to get their driving gloves on the latest, shiniest models.
And in these Uncertain Economic Times the most important feature car buyers will be thinking about won't be the colour of the paint, how big the alloys are, or which former Monty Python star's accent the SatNav speaks in, but rather the payment option that represents the cheapest and most cost effective way of purchasing the vehicle.
Finding the best way to pay for your car is more important than ever, particularly with other motoring costs like road tax and petrol constantly on the rise.
It is also a well known fact that the average vehicle loses over half its value after the first three years, and this is simply a drawback that most of us can no longer shrug off.
Fortunately, there are car finance options that take depreciation into account while offering low monthly payments, meaning that, despite the best efforts of our government, you'll be able to afford to keep your car on the road.
One of these options is leasing. Car leasing is a great way of acquiring a brand, new car without busting the bank and has soared in popularity recently as more and more motorists put month-by-month affordability to the top of the options list.
According to BMW's Financial Services arm, car finance applications have risen 9 per cent since last year as loans from High Street lenders become less of an option for car buyers.
"This is down to a number of factors," says Joe Pattinson, General Manager Marketing of BMW Financial Services.
"Including high street lenders continuing to have relatively high rates on their personal loans and also making them harder to obtain, which means they have become a less attractive option to car buyers."
Another increasingly popular form of car finance is Hire Purchase which despite being costlier than leasing on a monthly basis, can work out cheaper in the long term.
However, which option is best for you entirely depends on what you want from the car and how you plan on using it. Many people will find that the more traditional ways or purchasing a car, such as with a personal loan or a credit card, are still preferable.
Car leasing: Personal Contract Purchase and Personal Contract Hire
If you love the feeling of regularly driving a brand new car then leasing is probably the best and most cost-effective way to go. Monthly payments are low, upgrading to a new car 2-4 years down the line is virtually hassle-free, and you won't suffer the effects of depreciation.
Another big bonus with leasing is that you may find you can afford a more prestigious car than if you were buying.
For example, on car finance comparison site FinanceACar, a 3-door Audi A3 1.6 is available on lease for £211 per month ex. VAT, whereas a Nissan Micra 1.5 dCi 86 Visia on a personal loan with an average rate of 9.9% APR would set you back £249 per month.
Co-founder of FinanceACar, Nadim Saad, says: "A BMW 1 series can be financed on a car lease for as little as £220 per month and after three to four years you can have a stress free new upgrade much the same way as your mobile handset."
There are two common forms of car leasing, Personal Contract Purchase (PCP) and Personal Contract Hire (PCH).
PCP is essentially a form of car leasing where at the end of term you have the option to purchase the car outright with a lump sum payment.
Advantages of PCP:
- The initial and monthly payments on a PCP plan are generally significantly lower (up to 60% so) than on a car loan, dealership finance deal or hire purchase.
- You do not have to pay off the full, original value of the car, just what is agreed in the lease over the agreed term - typically 24-48 months.
- The minimum guaranteed future value (GFV) - the amount set by the lease company at the start of the term which you pay to own the car outright at the end of the term - ensures you will not lose out due to depreciation.
- If you feel the value of the car has depreciated below the GFV, you can simply choose not to pay it and hand the car back.
- The vehicle will always be under warranty.
- Road tax for the first year is always included, and is also usually offered over the entire term of the lease.
- PCP is a great way to drive a brand new car to your specification, and the lease company can do all the hard work associated with car ownership (e.g. maintenance, selling it on) for you.
Disadvantages of PCP:
- Under PCP, the car does not belong to you until you have paid the GFV, meaning you cannot modify it or exceed the maximum mileage set by the lease company.
- If you decide to cancel the agreement you will likely have to pay a penalty fee.
"Demand for PCP is increasing, as more people are waking up to the benefits of the product," said BMW's Joe Pattinson.
"Our car finance products provide a more convenient and affordable option for many people."
Personal Contract Hire (PCH) is very similar to PCP and often works out even cheaper on a monthly basis, but as the name suggests, the option to purchase the vehicle at the end of the term is not guaranteed.
The advantages to PCH are principally the same as PCP - the monthly payments can be significantly lower than those with a car loan or hire purchase, there is less financial risk through depreciation, tax is usually included and the customary hassles of car ownership are mostly put into the hands of the leasing company.
PCH also has the same pitfalls, namely a lack of true ownership, maximum mileage limits and penalty fees for early termination.
Hire Purchase (HP)
HP can be described as a compromise between leasing and buying. You pay an initial instalment (usually around 10%) and then a set number of monthly payments across an agreed term - usually 1 to 5 years - to the finance company. The driver finally takes ownership of the vehicle once the final payment along with a small transfer fee have been paid.
However, unlike with leasing, you must pay the full value of the vehicle, so the monthly payments are significantly higher.
Despite this, if you plan on keeping the car for more than 5 years, it will work out cheaper than leasing as there will be no further payments to make once you have paid the final instalment.
As the finance company owns the car until you have repaid them in full, you are not allowed to sell the car on or make any modifications to it.
They are also able to repossess the vehicle if you fall behind on payments.
Olivier Beau de Lomenie, MD of loan comparison site thelendingwizard.com also advises potential HP buyers to look out for deals offering flat rate interest.
"Hire purchase agreements are often based on flat rates of interest, where the same amount of interest is charged over each year of the term of the loan, which often appears to be lower than an APR, but this may not actually be the case. Be sure that you are comparing like for like when looking at these types of rates," he said.
The alternatives to leasing and HP
If leasing leaves you cold and you'd prefer for your car to belong to you and no one else, then there are plenty more financial options to choose from...
Personal loans and car loans
The most common form of car finance is via personal loans. By taking out a loan you can pay for the car outright and own it from day one.
"A personal loan gives even more flexibility as it is not tied to the car," said Mr. Beau de Lomenie
"So therefore you can sell the car at any point without having to settle the loan, you also may have more flexibility around the lenders you can approach, with them not being linked to a specific car dealership, and can be used to purchase privately sold cars."
At the time of writing, both Alliance & Leicester and Sainsbury's are offering unsecured loans with a typical APR of 7.7 per cent.
Nationwide are also offering a personal loan with a typical APR of 7.7 per cent typical to existing Flex Account customers.
Chris Rhodes, Nationwide's product and marketing director, said: "The finance packages offered by some dealers may look appealing - especially if there is a 0% deal - but a personal loan could be the cheapest option for new car buyers.
"It is important to understand the full terms and conditions; for example, a special offer of 0% finance for the first year that then moves onto a higher rate for the rest of the term of the loan may well prove more expensive in the long run."
Total repayments can vary wildly so it is advisable to shop around and compare loans to find the best deals.
The pitfalls to personal loans are obvious, default on your payments and the lender can pursue you personally for the money you owe them.
You will also have to absorb the full whack of depreciation personally and may find yourself in negative equity.
Credit card
Another way to own a car outright from the start is to purchase the vehicle with a credit card.
There are a variety of cards offering zero per cent on new purchases for a certain period, and once the promotional period expires you can shift the balance to another card such as the Barclaycard Platinum Card which offers a zero per cent balance transfer period of 16 months.
Compare credit cards for the best deals.
Cash
Alternatively, if you have plenty of money in the bank, pay the dealer in cash.
The obvious advantage to buying a car with cash is that there are no further costs to pay once you take delivery of the vehicle.
The disadvantage is that by taking the money out of your savings you will no longer be earning interest on it.
By keeping the money tied up in savings and investments and spreading the costs out over several years, you may actually save more money in the long run - although this will depend on the type of finance deal you go for.
To compare quotes from all types of car finance - PCP, PCH, HP and personal loans - visit Finance A Car, the world's first full car finance comparison site.
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