Analysing your options for car finance

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For a lucky few employees, the issue of financing a vehicle is taken out of the equation by virtue of a company car. In fact, recent statistics show that benefit-in-kind tax was paid on approximately 1 million cars in the UK in 2014/15, so the lucky few are not that insignificant in number.

For the rest of us though, the realities of funding these increasingly-expensive machines is an unavoidable reality. After all, buying a car goes far beyond merely paying the shelf price. Running costs and insurance alone are a big money drainer, and it’s thus absolutely imperative that you go about financing a vehicle in a way that works for you.

Purchasing from cash/savings

With interest rates now at new record lows, there is little to be gained from keeping savings in the bank, or in a Cash ISA, so if you have the funds available, it could well be tempting to buy the car outright. The benefits to this are obvious, however, there are a couple of things to consider. Firstly, you should ensure that you have enough money left over for subsequent car expenses – not to mention those within the broader spheres of life! It may also be better to pay the cost of it in full on your credit card in order to benefit from the protections that come with this – provided you then pay the balance of the card off that month.

Hire Purchase

This is a popular payment plan for new cars whereby instalments are spread over a period of between 1 – 5 years, with a 10 per cent deposit typically mandatory. The loan is secured against the car, so you only gain ownership once you’ve completed the final payment. These are generally easy to arrange, and the low required deposit is appealing. You should note though that these seldom work out cost efficiently for short-term agreements.

Personal loans

Opting for personal loans to finance your car has also become hugely popular, given that the market for car loans has become increasingly competitive and dynamic, with many alternative lenders offering excellent rates. Low base rates have also added to the appeal of personal loans, while the fact that no upfront deposit amount is required can be a big pull factor. Just bear in mind that your credit score will be decisive as to whether you get approved for the car loan, and what rate you will be charged.

Lease

Another option is leasing a car, whereby you pay a fixed monthly amount to the dealer for use of the car. This amount includes all maintenance and mileage (provided the latter doesn’t exceed the agreed limit), and therein lies the big perk of going down this route. You’ll never need to have any worries about the depreciating value of the car, as it will never affect you. The converse of this, of course, is that you will not own the car when the payment period is complete, unlike hire purchase.

Deciding from all the options

There are other ways of doing it too, such as a personal contract plan (similar to hire purchase). However, when considering all your options, the key things to focus on are:

  • How much, if any, can I afford to pay upfront?
  • How important is car ownership to me, given that it is a depreciating asset?
  • Will I be able to afford repayments for the foreseeable future?
  • Is my credit file optimised?
  • Have I shopped around enough on finance deals?

Answering these questions should help to point you in the right direction, and ensure that you finance your next vehicle in the best possible way. Given the share of your income this is likely to absorb, it’s a decision you want be sure you get absolutely correct.

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