When it comes to making major financial decisions, most people like to think that they are perfectly capable of weighing up all of the pros and cons of the situation and making carefully considered choices opting for the deals which make the best financial sense. However, when it comes to cars, it often seems that such a rational approach flies straight out of the window and this is one instance where the heart tends to rule the head. Car financing has certainly changed in recent years and there are now many different options to the traditional method of buying on HP. Each method has its own merits but there are many potential pitfalls which could catch out the unwary.
The major types of car finance are as follows:
Bank Loan – A straightforward loan from a bank or other financial institution can make funds available for the purchase of a vehicle and in many but not all cases, such a loan may be unsecured. Interest rates vary.
Cash – In the used car market cash remains king but it rarely features in the higher echelons of the motor industry. There is a common misconception that this is an interest-free alternative but this is not strictly true as interest can be earned as well as paid. The trifling amounts currently paid by banks may be insignificant but any sizeable amount of money has the potential to generate more. There are many ways to invest money but, as an example, the amount needed to buy a decent car could quite easily be used instead to obtain a holiday caravan with the potential to provide a respectable rental income.
Dealer HP Finance – Car dealers invariably offer HP finance sometimes from the car manufacturers or more usually from specialist car finance companies. Such finance usually involves the payment of a deposit followed by fixed monthly payments. This almost invariably means that the car is subject to negative equity for the major part of the finance agreement. Such loans are normally secured on the vehicle itself.
Rental – This is probably the simplest and most easily understood way to use a vehicle for a fixed time period. It is ideal when a particular type of vehicle is needed for a short time. For longer term use, there are more cost-effective alternatives.
Personal Contract Hire – Also known as Personal Car Leasing, this is the longer term equivalent to car rental and in many ways offers the most predictable monthly costs. A fixed monthly payment is determined depending on the make/model chosen, annual mileage and length of the lease. This payment factors in the predicted depreciation during the lease period meaning that at the end of the agreement the car is simply returned. In most cases, a new agreement will then be chosen.
Personal Contract Purchase – Many people are attracted to the idea of personal contract hire due to it offering a stress-free and affordable way of driving a much better car than would otherwise be affordable but still cannot come to terms with the idea of never actually owning the car. PCP has therefore been devised in such a way that the monthly car purchase payments are kept very low, similar to those offered on a PCH scheme, but with a large final “balloon” payment being required at the end of the term in order to complete the purchase if desired. In the world of car finance, this amount is known as the guaranteed minimum future value (GMFV) figure. If such payment is not forthcoming, the car is simply returned. The main problem with such schemes is the fact that cars are normally subject to negative equity throughout the term and despite the fact that those selling such contracts often imply that some equity is likely to be built up by the end of the scheme, this rarely if ever proves to be the case and there is very little chance that any equity will have accrued to be used as a deposit on a new agreement. The best that can realistically be hoped for is to be able to simply hand the car back and walk away. Even more problems are possible if circumstances dictate that the agreement has to be terminated early as any negative equity must then be repaid.
It is clear to see from the above that all cars cost money and it is up to the consumer to choose which method of car financing offers the best value for money. There are some great new cars available many of which are no longer out of reach for the average motorist but it must be remembered that cars remain a depreciating asset and the sums really need to be done first. Choosing a car is always exciting and there is absolutely no reason why the heart should not play at least some part in the decision making. Have fun!
