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Plot the perfect route to your next car purchase

With the UK motor industry booming, many experts are suggesting there has never been a better time to invest in a car. But whether buying new or second hand, big or small, practical or luxurious, knowing the different options for financing your purchase is a must.

Is cash still king?

It is no longer the go to option when it comes to buying a car, but good old-fashioned cash does still have its place. Buying with cash is quick and easy when it comes to purchasing from a private seller and it is not out of the question when it comes to mainstream dealerships.

It is true, however, that many dealers are biased towards newer car finance options. This is partly because cash buyers often have a finite total in mind which leaves salespeople little room for negotiation and add-ons but also because finance companies often issue incentives to dealers if business is sent their way. So although cash buying is an option, it is worth exploring what else is available to you when purchasing a car.

Hire purchasing

Currently one of the most popular car finance options, hire purchase offers a high level of consumer protection in addition to being relatively straightforward to arrange. Usually a fixed cost agreement with a regular monthly payment, hire purchase gives the driver the option of owning the car when the last payment has been made. Hire purchase can also be utilised by those with a poor credit history too.

Lenders and car dealers will expect you to make a deposit towards the cost of the hire purchase, but it is worth remembering that the higher the initial deposit, the lower the monthly payments will be. Although the system is a popular one, there are restrictions when it comes to hire purchase. Most significant is the fact that until the payments are completed and the original agreement met, the car remains the property of the financier. As a result of this, no modifications can be made, so considering other finance options might be beneficial for those who like to put a stamp on their vehicles and make them their own.

Leasing

With the greatest cost of car buying often considered to be depreciation (in fact, a new car loses value in the first few seconds it exits the garage forecourt), many are considering the option of leasing a vehicle instead of buying. Ideal for those wanting to avoid excessive borrowing but keen to drive the latest cars, leasing allows you to determine a monthly rental price for a fixed term at the end of which the car is simply handed back to the company it came from.

However, it is worth noting that mileage comes into play when leasing is an option. Most companies that deal in car leasing will specify an upper mileage limit for drivers to adhere to, with the failure to do so potentially resulting in additional fees at the end of the contract. Furthermore, although the depreciation is for the lender to deal with, returning the car in a less than acceptable state can lead to a loss of deposit and a dispute over contract conditions.

Personal Contract Purchase

A further option that incorporates the flexibility of hire purchase is PCP, or Personal Contract Purchase. Increasingly popular, drivers can choose their car, deposit amount and contract length in agreement with the dealer and are given the option of buying the vehicle outright with a lump sum payment at the end of the agreement. A key difference between PCP and the previously mentioned hire purchase is that monthly costs are generally lower. This is because the price is calculated against what is known as a GFV (guaranteed future value), so in essence, drivers are actually paying for the depreciating value of the car, not its initial cost.

However, unlike hire purchase, PCPs rely upon driver and dealer agreeing on an estimated mileage for the time the contract will run. Calculating your potential annual mileage is essential in order to pitch monthly payments at the correct rate. For example, over-estimating can mean the GFV is altered and you could end up paying more. On the other hand, exceeding the estimated total can result in fines per mile over the limit, so as accurate an approximation as possible is a must.

Credit card

Less common, but still an option, is using a credit card to finance a car purchase. Perhaps most noteworthy is the consumer protection that comes with purchases made on credit cards. The Consumer Credit Act of 1974 means that purchases between £100 and £30,000 are protected in case there is an issue with the dealership or the vehicle itself. In addition to this, choosing the right credit card can mean taking advantage of introductory deals such as 0% interest on all purchases made. Just make sure the money is paid off before the 0% period comes to an end.

There are two primary issues when financing a car on a credit card. Firstly, that not all dealerships readily accept it as the sole method of payment and secondly, unless you have an exceptional credit record, your card limit may only be enough to cover a deposit and not the car as a whole.

Thank you to Louis Rix, Director of Carfinance247.co.uk for contributing this in-depth guide explaining the different ways to finance your next car.

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