How to best finance a new car purchase

As consumers one of the largest purchases we will ever make is that of a new vehicle. The only purchase which typically comes before it would be the purchase of a home. As such deciding to update or upgrade your vehicle needs to be fully and carefully considered. There are so many different forms of finance which exist in our modern-day economy that the ability to make a large-scale purchase, such as a new car, can be funded via a number of different avenues. Increasingly over the years the general level of credit availability has vastly increased and as such so has consumer borrowing. This means that the average UK consumer is now likely to be managing more credit than the average consumer of 20 years old. As such, any form of new credit based commitment should be fully considered in line with what is realistic and affordable. Sometimes the purchase of a new car is necessary rather than wanted and on other occasions consumers simply wish to change their car where it is within their financial capabilities to do so. In either instance the main point here remains the same; credit based purchases must be planned and considered fully in advance. Today with all of this in mind, we will be looking at the various avenues which exist for financing the purchase of a ‘new’ car.

It is important to first mention that wherever it is possible to finance a new vehicle purchase privately, whether this be from savings or via a part-exchange of an existing vehicle, this will always be the most cost effective option. The reason this is so is because in the clear majority of cases when agreeing to a credit based financial commitment there is likely to be interest payable. Currently the interest rates being given on any one of the leading UK bank savings accounts are at a record low and as such using savings, where possible to do so, will most likely be a more cost effective manner of dealing with your new vehicle purchase. Many of us will not have the readily available funds to support the purchase of a new car and this is not uncommon as mentioned in the early part of this discussion. Another important point to clarify is that a new vehicle is a relative term, car dealerships will advertise their vehicles as New and Used but a new car in this context simply means a newer than your existing vehicle.

When it comes to finance for the purchase of a vehicle, there are two types of options at our disposal. The first of which is finding finance outside of the provider of the new car and the second is the finance offered in the dealership as part of the overall purchase. There are several different routes to finance outside of the dealership including a bank loan or a credit card provider. Keeping these examples in mind the finance which is available within the dealership is likely to be more varied. The first type of finance will be a Hire Purchase agreement, which sees a pre-agreed number of repayments being made to repay the cost of the car, usually over no more than 5 years. There will often be a minimum deposit and the interest rate available will vary depending on the specific purchase. The other type of credit available is what is known as a PCP, which is a Personal Contract Purchase. With a PCP the term of repayment is usually 3 years and often this is offered specifically on new vehicles. Part of the agreement is that a pre-determined amount is ‘held’ until the end of the 3-year period and is therefore ‘due’ after this time have passed. This payment is often referred to as a Balloon Payment or Settlement payment. There are several options available to the customer when this payment becomes due. The car can be part-exchanged against the value owed and a new agreement entered, the amount can be paid out-right and the vehicle is then fully repaid or this amount can also be refinanced; usually at a different rate than previously offered.

To ensure the best form of credit for funding is selected, this will be dependent on several key factors. The first of which is your own financial circumstances and therefore restrictions and the second is the total amount payable for any of the one options. Total amount payable means the cost of the purchase and the total cost of the interest charged across the entire term. That being said, it is also important to consider the direct amount you will be required to pay each and every month whilst the credit agreement is active. Whilst the total amount payable may be higher because of a higher interest rate, it may be that this particular option should not be discounted because the monthly repayment amount offered is realistic and affordable.

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Author: Internal Customer Services Agent

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