New Car Finance Options
Published Date: 30th Oct 2013
New car finance can be a conundrum with a number of options usually on offer, below we’ll give you a breakdown of the potential options that may be presented to you but first lets run through a few quick general check of things you should be aware of:
Lenders often add document or administration fees, typically these might be a charge at the outset sometimes called a processing or document fee and also at the end of the term there may be ‘an option to buy’ fee. Make sure you check carefully before signing on the dotted line, there have been examples of lenders charging as much as £400 for an ‘option to buy’ fee at the end of the finance term, which is obviously a big ‘extra’ on top of the cost of the vehicle and any interest repaid.
Secondly always take into account the initial price tag of the vehicle and make sure you shop around, often buyers are ‘pulled-in’ by an excellent low cost finance option only after signing on the dotted line to realise that the actual initial price of the car is inflated.
When comparing new car finance deals make sure you work on a total cost:
Vehicle price tag + Total interest to be repaid + admin/processing/option to buy fees
Note that UK Car Discount do NOT add any document, admin or other hiddens fees!
Now you’ve done the initial checks here are the options that may be on offer:
New Car Hire Purchase or HP For Short
A new car hire purchase finance agreement is an arrangement that allows the client to pay for their new vehicle in equal monthly instalments over a fixed term usually from 1-5 years, at the end of the agreement you own the vehicle outright. Usual advanatages of a HP agreement are the flexibility to choose to pay for the vehicle over anything from 24-60 months and although the finance vendor will stipulate a minimum deposit you have the option of paying a larger deposit thus reducing your monthly payments and should you decide to, you can pay the outstanding amount bnefore the term ends for earlier ownership of the vehicle.
To summerise, HP finance is an convenient way to arrange new car finance with the flexibility to tailor the finance to your monthly budget. Typical interest rates for HP finance on a new car are between 7% and 13%. Note you won't own the vehicle outright until the final payment has been made and usually under the terms of the agreement you will not be able to make changes to the car until then.
New Car Lease Purchase or LP For Short
A new car lease purchase agreement is a form of Hire Purchase usually for private or non-VAT registered companies who want to own the vehicle at the end of the finance term. The main difference between HP (Hire Purchase) and LP (Lease Purchase) is that with an LP agreement part of the cost is deferred to the end of the agreement thus lowering monthly costs.
At the end of the Lease Purchase contract a balloon payment is made to gain ownership of the car, this final payment equates to the resale value of the vehicle.
New Car Personal Contract Purchase or PCP
New car PCP is usually the best option for those who want to keep monthly payments low and want a brand new vehicle every 2-4 years. You pay an upfront deposit and monthly instalments with a lump sum left to pay off at the end of the contract, the amount deferred to the end of the term is set by the finance company and is usually referred to as the minimum guaranteed future value, the lender guarantees that the vehicle will be worth this amount end of the contract term based on the vehicle being in good condition and mileage no higher than a figure you stipulate at the outset of the contract (for example you may declare that you will not exceed 10,000 miles per year). At the end of the contract you have the option to pay the deferred sum and own the car outright, sell the car to fund the final payment or hand the car back to the dealer/lender. Many people use PHP as means to have new vehicles on-tap and will hand the vehicle back and start a new 2-4 year PCP contract.
PCP may work out more expensive than a HP deal especially if you decide to pay the final deferred sum for outright ownership of the car. Alternatively if you decide to return the vehicle the dealer/lender you need to make sure the car is in good condition as they may charge you for any damage to the vehicle (this will be in the contract), also if you’re mileage exceeds the stated amount agreed at the outset then the lender will charge you for the additional mileage on a per mile basis.
0% Car Finance
Best suited to those who can pay a large deposit, possibly as much as 35-40% of the vehicle value may be required at the outset and the balance is repaid over an agreed term with interest free payments. Often the loan term may be a shorter than other forms of car finance pricing people out with a tight monthly budget. Also you advised to look closely at the total price of the vehicle as you may found a 0% finance deal may mean a larger initial price tag on the new vehicle and might be ‘false economy’.