How to choose the best car finance plan for you?

Sponsored Content 31 May 2022

Finding the ideal financial package when purchasing a new car can be a daunting undertaking.

Most people seek some kind of financial funding, no matter if it's for their first car, a family car, or after they retire. That is why it is important to determine which financing plan is best for your lifestyle and budget.

Whether you're searching for a steady run-around or want to cross that sporty convertible off your bucket list, there are several solutions available to assist you to purchase that ideal car, so you don’t need to hold back.

Of course, all running costs should be factored in, including any upfront purchase costs, fuel prices, insurance, road tax, and maintenance. However, you might be surprised to see that with the car finance options available, your perfect car could be within reach.

So, how do you make it affordable for yourself?

Most people think their budget can only stretch to a used car.

However, you will quickly find that car manufacturers will tend to offer much lower finance rates for their new cars compared to that of a used car, which can go a long way towards helping people afford such a vehicle.

Not only that, but it is also likely you’ll be able to find a finance deal on a new car that has a deposit contribution from the manufacturer, helping you save even more money.

It will still help to have your own deposit, however, as the bigger the deposit, the lower the monthly payments. Always a top suggestion is to part exchange your outgoing car, not only helping you get rid of it, but also allowing you to typically reduce the cost of the new vehicle by quite a margin.

You will also need to consider the length of the finance term, which is typically 36-48 months – the longer the term the cheaper the payments are, but you’ll also accrue more interest costs.

If you’re looking at a PCP deal (Personal Contract Purchase), you’ll also need to consider how many miles you plan to do on an annual basis, as this will also affect the cost of your payments. The more you plan to do, the more your payments will cost.

Once these factors are taken into consideration, the monthly payment can be calculated, and you can see how the deal works out for your budget.

I'm retired, so can I still receive car financing?

Nothing really changes when you're receiving a pension. Car financing is determined by your ability to pay each monthly payment without fail, as well as the strength of your credit score.

There's typically no reason why retired people can't get financing.

In retirement, you may have numerous sources of income, be it one or several pensions, savings, or even money coming in from a rental property.

Whatever your sources of income are, you just need to be able to show that they are reliable and consistent, and that you are capable of repaying finance over a long period.

What are my best options for financing a used car?

You need to consider certain factors before entering into a Car Finance Agreement, and it’s important to know your limits and acknowledge what you can afford to pay out each month.

Take a look at the following options which will hopefully offer some guidance on which direction is best for you.

Personal Contract Purchase (PCP)

This is one of the most popular vehicle financing options, owing to its flexibility. PCP car finance not only allows for low monthly payments, but they also give you a variety of options at the end of the agreement.

A key element of this financing plan is that you do not initially own the vehicle after the final monthly payment; however, at the end of the term, you’ll have the choice to:

  • hand the car back and walk away
  • use any equity in the vehicle towards a new one
  • pay the final payment and make the car yours

One component of a PCP deal that may throw the uninitiated off guard is the prospect of mileage. As a PCP deal hinges a lot on how much value is being lost during the contract, you will need to declare an annual mileage that will then add up to a total contract mileage.

For example, if you plan to do 8,000 miles per year on a 48-month contract (four years), the total mileage for the contract would be 32,000 miles.

Once the term and mileage have been declared, these will be used to calculate the amount of depreciation the car will be susceptible to and, as a result, what the car will be worth at the end of the contract.

This figure (usually stated as the GMFV) would then act as the final amount you would need to pay if you wanted to take ownership of the car. With a lot of the car’s value tied up in this optional final payment, the monthly payments will typically be cheaper compared to something like Hire Purchase.

How the mileage and the length of your contract affects the monthly payment is important.

Limiting your miles and stretching out the contract will result in lower payments, while doing more miles over a shorter contract will make them more expensive, so it’s important to find a balance that works for your needs and budget.

If you go over the agreed mileage figure, and you plan to just hand the car back at the end, you would have to pay a certain figure per excess mile you’ve done (worked out at so many pence per mile).

Example: you planned to do a total of 32,000 miles over the 48 months, but you actually did 33,000 miles (excess of 1,000 miles) - at a rate of 7.0 pence per mile for excess mileage, you’d need to pay £70 in excess mileage fees.

Hire Purchase (HP)

Hire Purchase financing is ideal if you want complete ownership of the vehicle, and also if you want to spread the cost over time with fixed monthly payments and no mileage limits.

An HP deal is probably the simplest finance option out there, but not necessarily the cheapest on a monthly basis as, unlike PCP, you’re paying towards the full value of the vehicle (minus your deposit).

However, putting down a solid deposit or part exchanging your current car will keep these payments down. Furthermore, the contract term can also affect your payments by raising or lowering it.

At the end of the agreement, once you've made that final payment, you'll have full ownership of the vehicle.

Personal Contract Hire (PCH)

If you’re the kind of person who loves to get a new car every few years, then Personal Contract Hire (PCH) might just be the route for you.

Often refenced as leasing, this could be an ideal alternative for you if you want to keep up with the latest models and don't want to commit to buying one. In other words, you only pay for what you use, so there's no need to be concerned about vehicle depreciation.

Just like a PCP deal, the period and mileage must be agreed upon, followed by the upfront payment (known as the Initial Rental), so the contract can begin.

Also much like a PCP deal, PCH contracts are liable to excess mileage costs, as well any excess wear and tear stipulations, so be mindful of these when starting a contact.

Conditional Sale (CS)

Another fantastic option for those after outright ownership.

With a Conditional Sale deal, you will be the registered keeper, although the finance company owns the vehicle during the contract. Once the final monthly payment is made, the car will be yours.

You usually put down a deposit in the region of 10% of the car’s value (which again can be supplemented with a part exchange car) and then determine the length of the agreement with a fixed interest rate.

Additional Options

0% car finance deals

Many dealerships represent manufacturers who can provide no-interest financing on certain vehicles. It's perfect for people who don't want their costs to rise over time.

Keep in mind that to be eligible for 0% financing will almost certainly require a good credit score and, in certain cases, a greater deposit than usual.

No deposit deals

You might not have enough money to put down a deposit or a vehicle to trade-in, but that doesn’t mean you can’t get a car finance deal.

Because upfront funds aren’t always required, a No Deposit deal may be the ideal option for you. Just be mindful that, without a deposit, your monthly payments will be higher than those if you have money to put down or a part exchange.

However, keep an eye out for a manufacturer deposit contribution while shopping for a new car. These can run into the £1,000s and kindly bring down that monthly payment amount.

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It's easy to see how some people could get overwhelmed with so many financial options.

Take the time to look at each finance type and understand the advantages and disadvantages in regards to your own circumstances

After you've chosen your ideal car, any respectable car dealer will go through your financing choices with you, but it's best to do your homework first, so hopefully the above went some way to helping explain your options.

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