There are so many different ways to get yourself a brand new car. From purchasing it outright to using one of the various different financing options, you have a myriad of options to choose from. But paying cash for a new car is something the large majority of us won’t ever be able to afford.
So, that generally leaves you with car finance. But knowing which finance method to choose is a tough decision to make. That’s why we are going to take a look at what car finance deals are available to you!
What Is Car Finance?
To begin with, we should talk about car finance in general. After all, without a base understanding of what a car finance deal is, it can be extremely difficult to know which one would be right for you.
In short, a car finance deal involves you signing up to a monthly finance agreement with a finance broker. These could be a bank, a car dealer or a specific financial institution. Either way, they will pay the price of the item you are buying (in this case, your brand new car) and then you agree to pay them back over time.
However, there will always be interest involved, where you will end up paying more over time than the total price of the car. For example, if the interest rate is a fixed 3% and the price of the car is £10,000, then when you finish paying off the car you will have paid £10,300.
This is a very limited and specific example, as a lot of interest is cumulative, meaning you will pay more than that, but it helps to get the basic understanding across.
With all of that said, it is important to know that it also directly affects your credit score, especially if you miss payments. On top of that, depending on the finance option you choose, you won’t technically own the vehicle until you have repaid said finance. So, that leads us nicely into looking at the different car finance options specifically.
What Is Hire Purchase?
The first thing we will look at is Hire Purchase. This way of getting your hands on a new car involves signing up for a long term finance deal with a final lump sum payment to purchase the vehicle.
You will have to gather enough money to pay for the initial deposit, which is typically equivalent to 2 or 3 months of the ongoing payment. From there, you sign up to pay a recurring fee each and every month for between 3 to 5 years on average. Then, at the end of the finance period, the remain value of the car will have to be paid as a single payment.
This can, realistically, lead to a rather large payment if you choose a more expensive car. Therefore, when you are looking at Hire Purchase as your finance method, it is generally better to look for a cheaper and more affordable car. This is especially try as it can have a seriously negative impact on your credit score if you either miss payments or cannot afford the final, lump sum payment.
Because of this, getting a new car on a Hire Purchase contract should be a very carefully thought out decision. You need to look at your finances in detail and determine what sort of deposit, monthly payments and final payment that you can actually afford. Then, you can see which cars are available for that price. It is not recommended to look at cars first, as you could get yourself into serious financial trouble if you find that you cannot afford the payments.
What About A Loan?
Another option you could look into is getting a loan from a bank. The biggest difference between a standard loan and Hire Purchase is that you would not have to pay a deposit and final lump sum payment.
Instead of this, the bank will loan you the money to purchase the car outright. Then, you have to pay a fee each month back to the bank to cover the money that they gave to you. In most cases, this is a fixed monthly fee depending on the length of time that you specified for repayment.
Because of that, it is much easier to balance in terms of the cost and fees each month than a Hire Purchase contract would be.
However, it is important to note that interest rates will be applied to your loan. This can either be at the very start of the process if the loan is fixed term, or each year if it isn’t. Therefore, you will almost always end up paying more than you borrowed, and far more than the value of the car.
That, of course, means that it isn’t the best investment method, since the value of the car will immediately decrease as soon as you drive it out of the showroom. It will also continue to drop in value as you use the vehicle, but the amount that you have to repay to the bank won’t go down with it.
In short, you’re actually going to lose money by buying a car with a loan from the bank.
What Is Car Leasing?
So, we have looked at the two most commonly known ways of buying a car on finance; Hire Purchase and a bank loan. But what if you looked at it differently? What if actually buying the car wasn’t the focus here?
Now, that might sound strange, but bear with us here.
The main reasons why people want a new car would fall into the following categories;
-
The old car is falling apart.
-
New safety features.
-
A more enjoyable driving experience.
-
A desire for a more luxurious vehicle
Of those four, only one is actually specifically about the new car. The rest are just benefits of a new car or issues with the old one. On top of that, the one category that is about the new car is a “repeat offender” – you’ll always want to get something more luxurious because there will always be more luxurious vehicles being released.
Therefore, actually purchasing the new car might not really be what you want or need. In actuality, you just want to be driving the new car.
That’s where car leasing comes into play. As the name suggests, you would be leasing the car rather than actually purchasing and owning it. You get to drive the car without the concern of having to sell it in the future to get yet another new car down the road.
The way car leasing works is that, like with a Hire Purchase, you put down an initial deposit. From there, you pay a fixed monthly fee for typically 3 years. However, at the end of that finance period, there isn’t a lump sum because you actually give the car back! From there, you are free to “upgrade” to the latest model just like you do with you mobile phone.
This means that you can keep getting that “new car” feeling and experience on the road without having to find a way to buy a whole other vehicle. You just continually “upgrade” your car when the current lease runs out.
As if that wasn’t enough, you also don’t typically need to worry about maintenance costs for the vehicle either. Because it is a brand new car, it will be under warranty. And since a standard warranty lasts for 3 years, that will run out the day you give the car back. That means that throughout your time driving the car, you won’t have to worry about things like an MOT or the cost of repairing certain key parts of the vehicle.
This can be a huge time and money saver in the long run, since the cost of running a car is always higher than getting the car in the first place. That is, except when using a car lease agreement, since you won’t have to pay for the majority of the upkeep!
Oh, and there’s also one more small benefit to car leasing over finance purchases; it’s typically much cheaper.
This is because, when you actually buy the car, you are financing the entire value of that car. With a car lease, however, you are just paying for the depreciation in value. Because the dealer will sell the car on as an outright purchase after you have returned it, you only have to pay for the value lost during the period of time you had the car.
Therefore, your actual monthly payments are significantly lower than if you were to buy the car through other finance methods.
How To Choose Between Car Finance Options?
Well, now we know what the different options for financing a car are, the next question is how to decide between them! That can be a very tricky thing to do, so we are here to help at least lessen the pain.
The first thing you want to do is take a detailed and careful look at your finances. You need to make sure that you know exactly how much you can afford to pay each month without making life difficult for you and your family. This may very well be less than your initially thought, but that’s a good thing. It means that you won’t cause any financial problems for you all.
From there, you’ll also be able to see what sort of deposit you can save up for. If you need a car very quickly, then a lower deposit car lease or a loan might be best. If you are able to save up over a few months first, then your options are bigger.
The next step is to see what is available for the monthly price range that you can afford. It might be that you can’t actually get a suitable car on Hire Purchase or a loan for your monthly budget. At that point, you are pretty much limited to a car lease, which is usually the better option in the long run anyway.
Finding A Car To Lease or Purchase
Once you have determined which of the different car financing options is right for you, then you need to find the right car. We put together a guide on how to do just that, which you can read here.
However, in short, you need to look at your lifestyle and family situation. Spend some time figuring out what features are absolutely necessary for you, and which ones are “nice to have” additions. That will give you a strong basis for filtering out cars to narrow things down to a short list.
After getting the short list, that’s when you start looking at the “nice to have” additions and seeing which car in the short list provides the most things on that list. And since you’ve already worked out what your monthly budget is, you’ll be able to make sure that you can afford the car that you finally land on.
To help with that, we have an extensive list of new cars available for outright purchase here, and more available for car leasing here. So why not take a look through the ones we have listed so that you can at least get an idea of what is out there. You might even find the perfect car and deal for you!
But either way, make sure that you take your time and review all of the finance options before jumping into a contact. Make sure that you are going to be able to make the repayments, not just now but throughout the agreement. Oh, and of course, make sure that you enjoy the driving experience of your brand new car!