How to adequately plan your budget when considering the purchase of a new vehicle
In our modern day economy there are a whole host of different credit based facilities which are at our disposal and this is certainly the case when it comes to how we finance the purchase of a new car. Purchasing a car or vehicle of similar nature is, for the majority of us, the second largest purchase we ever make after a house and therefore it is reasonable to ensure sensible and realistic planning is completed in advance of the purchase. For many of us the purchase of a new vehicle will be with the assistance of a credit based facility and this means it is important to not only find the right car but also the best choice for our financial needs too. When making a large purchase of this nature it is important to fully consider what the options are available and which will be able to correctly meet your needs in and throughout the coming years. Today we will be looking at these options and how they can be correctly considered alongside a normal monthly budget.
In any circumstance where a purchase is being made if there is the ability to buy the goods or service outright there and then; this is likely to be the best and most cost effective choice. With exception of circumstances where interest free credit is offered, using your existing funds will work out cheaper than the interest charged across the period of borrowing. Obviously for many millions of us this is not possible and as such alternatives for gaining the required funding needs to be considered. The purchase of a new (or ‘used’) vehicle can be financed in a number of different ways and one of which is external funding, meaning not financing the purchase directly with the dealership from which the vehicle is being purchased. This could mean an existing or new credit card or perhaps a loan from your bank directly. The key is not only to compare the total cost of borrowing but also how each of the proposed resources repayment amount would fit alongside your existing monthly commitments. In the instance of a credit card there may be an opportunity to borrow interest free for a period but once this expires it will be as important to make sure the increased commitment due would be affordable. Talking to your bank may produce a number of ways in which the funds can be borrowed, allowing the term of repayment to be extended or decreased as required.
As touched on above the dealership from which the new vehicle is being purchased will also offer a range of different finance choices for your purchase. In some cases this may simply be a referral to one of their recommended financial suppliers or partners but in the majority of cases it is likely they will want to include the finance agreement as part of the overall package offered. The different types of finance being made available will of course vary from one dealership to the next but will often include Hire Purchase Agreements and Personal Contract Purchase agreements. The Hire Purchase agreements will be of the same nature as that offered by your bank in that a number of pre-agreed repayments will be made over time until the point at which the agreement is satisfied. Depending on the specifics of the purchase and with that I mean the vehicle chosen, it may be that the dealership is able to offer a better and more competitive rate than your bank. The second type of finance often offered when purchasing a vehicle is a Personal Contract Purchase. Designed to allow the amount being repaid each month to be reduced, a PCP is usually over a period of 3 years and takes a proportion of the cars value out of the financial equation on a monthly basis and instead is placed as a ‘one-off’ repayment at the end of the agreement. This means when the 3 years are up as a customer you have the choice to pay the lump sum, re-finance it or change the car by way of a part exchange and start the process again.
The key to selecting the ‘right’ financial option available is your ability to afford the monthly commitment set out to you. To plan for this correctly it is important to ensure the repayment amount is realistic and manageable when compared to all of your existing costs. These costs can be broken down to anything which is deemed as your normal living expenses, whether this be your rent, bills or existing credit commitments. Providers of financial commitments of this nature will also complete a number of checks to ensure the loan requested is affordable and able to be maintained as such throughout the course of the agreement.
Representative Example: Representative 1286.98% APR on a loan of £300.00 with 5 monthly repayments of £101.03 Total amount repayable £505.13 Annual interest rate (fixed) 290%
Warning: Late repayment can cause you serious money problems - For help, go to moneyadviceservice.org.uk
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Author: Internal Customer Services Agent