How should you pay for your new car?
If you are thinking about buying a new (or indeed new to you) car, there are a wide range of options available to you when it comes to financing the deal. Paying in cash or via a debit card, or using a credit option such as a credit card, hire purchase or lease all have their merits, and also have their drawbacks. Your own circumstances will dictate which is the best method to use for you.
Paying from your own funds
The most obvious benefit that comes with paying for the car yourself either via cash or debit card is the fact that you own the car outright from day one. This means that if you fall upon hard times, your car would not be at risk in the same way as if it was purchased under a credit agreement. Indeed, if your car is owned outright, and the times were hard enough, you have the option to sell the car and provide a much needed boost to the family economy.
On the flip side, many dealerships tend to offer the best deals when their own finance packages are used, generally because they make a greater profit when cars are purchased in this manner. An interesting trade off here would be to look at the total cost once the APR of the loan has been paid in comparison with the somewhat higher ticket price when paying cash. Secondly, when buying a car outright, a great deal of capital is required upfront, so this could be difficult to amass, thus necessitating some kind of loan.
Using a credit card
Whilst using a credit card to pay for a car negates the need for having the full balance of the price of the car upfront, remember that there is no difference to the dealer compared with you paying cash. You are, indeed, likely to get a similar deal to that offered if you are paying cash.
Whilst some credit cards come with generous introductory offers, with long 0% deals in place for a range of purchases, once these offers expire the interest paid on the purchase will be costly, and you are likely to pay far more for the car than you would with most other payment methods. Similarly, there are not many credit cards which have the facility to pay for a new car within the usual credit limit set.
A lease agreement
A leasing agreement with a company allows you to drive a car for a specified time, usually between two and three years for an affordable monthly payment. One of the biggest benefits of this method of obtaining a car is the fact that it opens up a wider range of cars than would ordinarily be available. Driving a prestige or luxury car is possible for a monthly payment of around £350 per month, with a deposit of three months of lease costs the norm. Costs may vary between providers.
Of course, the fact that you are only leasing the car means that you never actually own the vehicle. Over the course of the lease agreement, you could have, therefore, spent many thousands of pounds but not have anything to show for it at the end.
Personal Contract Purchase
A PCP plan again sets out a contract of a pre-arranged length, which gives a motorist the freedom to purchase a more expensive car than one that they would ordinarily manage. At the end of the contract, there is a right to buy, the cost of which is set at the beginning of the contract.
The actual terms of how the contract ends vary from provider to provider and the circumstances of the individual, so it is vital to check all of the details of the contract before agreeing to the terms.
Taking out a hire purchase agreement is similar to a lease agreement in that a monthly payment is made for a fixed term contract. The key difference is that once the contract is up, there is an option to buy. Whilst you are the registered keeper of the vehicle, you do not actually own the car until you have actually exercised the option to buy at the end.
Although you can benefit from the fixed costs of your motoring throughout the duration of the contract, you will still be liable for the costs until the end of the contract if the vehicle is damaged and you are not able to drive it.
Thank you to Louis Rix, Director at Carfinance247.co.uk for guiding us through the different ways to buy your next car.