Brand new cars with the latest ‘70’ number plate will start to arrive on forecourts in the next few days for sale from 1 September.

But those in the market for a new set of wheels – whether brand new or second-hand – should tread carefully if they need credit or finance to fund the purchase. Taking time to understand the pros and cons of various payment options can ensure you don’t pay over the odds.

New car sales usually spike in March and September – the months when new plates are issued – as drivers rush to be the first with the new numbers. But the coronavirus pandemic hit sales earlier in the year – new car registrations were down 44{d93457022679712214ff8a8035fa266341f9634f2c93d5e609b1bbb089e8c446} in March, the month when the ‘20’ plate arrived, according to the Society of Motor Manufacturers and Traders (SMMT).

Pent-up demand during lockdown saw sales rally in July and now, with most dealerships open again, business is slowly growing.

A similar picture has been seen in the used car market, where sales volumes halved during lockdown but are now recovering. Sales of battery and plug-in electric vehicles, though still a very small percentage of the total car market, have also seen a big rise in 2020.

Paying for a new car

There are many ways to pay for a new car. Cash is king as you won’t pay interest on any borrowing, and you might be able to drive the hardest bargain.

But not many of us could be cash buyers – hence the need for some form of financing.

If you know you’ll need to borrow or use credit for the purchase, it’s best do your research before you go to the showroom or dealership. This way you can make sure you know what price bracket you’re shooting for, and you can start to identify the most suitable finance for your needs.

What’s more, you won’t feel under pressure to accept the dealer’s terms.

The financial regulator – the Financial Conduct Authority – has expressed concerns over the car finance market in the past, particularly around pricing and sales commissions, and it has uncovered widespread mis-selling.

From January 2021 discretionary commissions from car finance plans will be banned, which should make things fairer for consumers and save them money.

What are the finance options for buying a car?

New and used car dealerships can offer a range of finance options. Always haggle on the car’s ticket price regardless of what finance deal you take. This is also true for any current car you might be selling or part-exchanging. It pays to push hard for a good deal. Here are the main products you may encounter:

Personal contract purchase (PCP)

Typically used for the purchase of new cars, these plans enable you to pay a deposit (often between 10{d93457022679712214ff8a8035fa266341f9634f2c93d5e609b1bbb089e8c446} and 30{d93457022679712214ff8a8035fa266341f9634f2c93d5e609b1bbb089e8c446}) and then make monthly repayments over a fixed term – usually two or three years – based on the value of the car. 

At the end of the payment plan you have the option to make a final lump sum payment – often known as a balloon payment – so you can buy the car outright. Alternatively you can hand the car back or you could return the car and enter into a fresh PCP on a new vehicle. 

The final value of the vehicle at the end of the PCP agreement is calculated at the outset of the plan. This is referred to as the guaranteed minimum future value or GMFV, and your balloon payment at the end will be based on the difference of this value and what you have repaid over the term.

PCPs are popular and make up around 90 per cent of all new car sales. But it is essential to understand the full cost, terms and conditions of any specific contract before you sign on the dotted line.

It is also important to note you will not own the car until you have made the final balloon payment.

You will usually be required by the dealer to stick to a maximum annual mileage. Extra costs might apply if you return the car at the end of the PCP term and you have exceeded the mileage or there is damage to the car. You might also find a very strict interpretation of ‘wear and tear’ is applied.

You will also be paying interest (APR, or annual percentage rate) on your borrowing through the PCP, and this could be much higher than that of a personal loan available from a bank or other mainstream lender. But this type of deal can suit drivers who want to drive a brand new car and be able to change vehicle frequently.

Personal leasing or contract hire

These plans work in a similar way to personal contract purchase, except there is no option to buy the car at the end of the plan. It is purely a way to lease a car of your choice, which you may not want or be able to purchase outright.

As with a PCP you pay the dealer a fixed monthly amount during the lease. This cost will be based on the value of the car, length of the contract and mileage. You may still have to pay an up-front deposit to lease the car.

Leasing will typically work out to be more expensive per month compared to a PCP for the same vehicle, but plans often include free servicing (through the dealer) and they may suit those who want to drive a brand new model and change it regularly without having to buy.

Hire purchase

This is buying a car on credit where the loan is secured on the vehicle. It is a popular option for buying new and used cars.

Usually you will pay an up-front deposit (typically about 10{d93457022679712214ff8a8035fa266341f9634f2c93d5e609b1bbb089e8c446}) followed by monthly repayments and you won’t own the car until the last repayment has been made. This means you can’t sell it during the term of the loan. The car can be repossessed if you miss a payment.

Check the APR or interest rate you are being offered by the dealer. It may be that you can find a more competitive rate with a personal loan.

Zero interest finance

Dealers will sometimes promote 0{d93457022679712214ff8a8035fa266341f9634f2c93d5e609b1bbb089e8c446} interest offers on a car, perhaps on an older model or a car they are struggling to sell.

With this type of interest-free finance you will usually have to pay a bigger up-front deposit, such as 30{d93457022679712214ff8a8035fa266341f9634f2c93d5e609b1bbb089e8c446}, but then no interest will be charged on the loan you take for the remaining value of the vehicle.

It could be a good option, but it is unlikely you will be able to haggle much on the price of the car.

You will only usually be accepted if you have an excellent credit score. If this is the case you can probably get competitive loan deals elsewhere so shop around first.

Mind the gap

Be prepared for the motor dealer to try to sell you gap (guaranteed asset protection) insurance, which is cover against depreciation in the value of your new car.

New cars, in particular, fall sharply in value in the first 12 months. Indeed, they’re worth less as soon as you drive them off the forecourt. So if you have an accident and your car is written-off, of if it is stolen, your car insurance will not pay out the price you paid.

This is where gap insurance comes in. It pays out the difference in the amount you are able to claim on your car insurance and the amount you originally paid for your car – or in the case of a PCP or other type of finance, the debt owed on the plan.

If you think you might want this added protection, standalone gap policies are available and are often cheaper than those offered in the showroom.

Credit cards and personal loans

Personal loan

You do not have to take the finance deals offered by the dealership. If you arrange a personal loan in advance and are in effect a ‘cash buyer’ you could get a much better price on a new or used car.

The personal loan rates you will be offered will depend on a range of factors including your credit history and credit-worthiness, how much you want to borrow and over what term. For some drivers this could present the best value route.

You can also sell the car if you fall into difficulties as it will not still ‘belong’ to the dealer, as is the case with a PCP or hire purchase plan. Interest rates (the APR) may also be lower than those on a PCP.

Bear in mind you will own the car and it is likely to depreciate in value. There could also be early repayment charges on the loan if you did want to redeem it early.

Credit card

Paying for a car with plastic can work well for some savvy cardholders (if your card limit is big enough) but only if you have a super low rate – or ideally make use of a 0{d93457022679712214ff8a8035fa266341f9634f2c93d5e609b1bbb089e8c446} purchase card and then switch the debt to 0{d93457022679712214ff8a8035fa266341f9634f2c93d5e609b1bbb089e8c446} balance transfer cards until you have repaid the debt.

There are usually fees attached to 0{d93457022679712214ff8a8035fa266341f9634f2c93d5e609b1bbb089e8c446} credit cards, typically between 1.5{d93457022679712214ff8a8035fa266341f9634f2c93d5e609b1bbb089e8c446} to 3{d93457022679712214ff8a8035fa266341f9634f2c93d5e609b1bbb089e8c446} of the balance, each time you transfer your balance to a new card. If you miss a payment you are likely to be moved on to a standard APR, which could be 18{d93457022679712214ff8a8035fa266341f9634f2c93d5e609b1bbb089e8c446} or 19{d93457022679712214ff8a8035fa266341f9634f2c93d5e609b1bbb089e8c446}, for example, or even higher.

It might also then be difficult to transfer the debt to a new low rate card as you may have damaged your credit score.

Using a credit card for all or part of the purchase (as long as the card transaction is at least £100) will give you section 75 purchase protection on the full value of the sale should something go wrong with the car.

Be aware some dealerships will not accept credit card purchases.

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