UK car sales are booming, partly driven by tempting finance deals, but is it the best way to buy a new car?
Consumer credit has blossomed into a way of life for the majority, and is increasingly the norm for car buyers. In the 12 months to August 2013, 74.5 per cent of the new cars that ended up in private hands were sold through finance deals rather than cash.
The rise to that point has been spectacular (in 2007 a shade over half of private cars sold were on credit) and it's largely down to the adoption – and promotion – of the Personal Contract Purchase (PCP) by car makers.
Paul Harrison, head of motor finance at the Finance & Leasing Association (FLA), claims it's driven by a post-recession desire to watch the pennies: "Car finance deals are generally written at a fixed interest rate which means people know exactly what the monthly repayments cost."
Those repayments can appear tantalisingly low. A new car for less than £100 a month makes motoring little more than another utility bill. For the car manufacturers, there are multiple business benefits to enticing customers into finance arrangements, and particularly PCPs.
Malcolm Banfield, sales director for RCI, which provides all the finance for Renault, Nissan and Dacia, credits the PCP with the increase in point-of-sale finance: "It's a win-win. Customers have lower monthly payments than with HP, more flexibility at the end, and they can change cars for a new model every three or four years."
For the manufacturer this last point is crucial. Banfield adds: "For the car maker there's a faster renewal of customers. You're getting a sale every three years. With cash or HP it's likely to be every six years."
FINANCE EXPLAINED
Why are finance rates so good at the moment?
The car market in continental Europe is shrinking but in Britain it's booming, so car makers are focusing on selling cars where they're wanted. To tempt owners in a highly competitive market, manufacturers are currently subsidising many PCP offers to make them more desirable.
How can buying through finance be cheaper than paying with cash?
When you buy a car through a finance agreement, the expectation is that it'll cost more than laying down a lump of cash because you'll be paying to borrow money. Often that's exactly the case. However, if a deal offers 0 per cent APR, there is no interest. When cars are also discounted, that can mean you don't have to put down a deposit and the money off can also more than cover the admin charges associated with the finance deal. The result makes buying through finance cheaper than cash.
What's the difference between various types of finance?
With hire purchase the buyer pays a deposit plus monthly instalments for an agreed period.
At the end of that, a (usually) small final payment means ownership of the car transfers to the purchaser. Personal Contract Hire is hiring the car for a defined period.
You pay a small deposit and monthly payments before handing the car back at the end of an agreed period.
A Personal Contract Purchase deal is a mix of the two, but with the car's value at the end of the agreement decided at the outset.
The "buyer" can then simply return the car and move on, return the car and put its retained value towards another vehicle, or pay an agreed fee in order to own the car outright.
Which is best? Manufacturer finance or arranging your own?
Paul Harrison from the FLA says: "That decision will depend on the car the customer is interested in buying and the finance providers that their local dealership works with. It's different in every case."
If you're using finance as a means of running a new car for a fixed monthly price, don't be seduced by a low headline figure.
Every deal is different, so it's important to compare the total cost of each option over the length of the contract.
Anything else to consider?
When you buy a car on finance, the lender is hedging against the car's future value. Cars that hold their value better can be more competitively priced on a monthly basis than those that lose money rapidly.
Another important determining factor of a vehicle's value is its mileage, so finance agreements have mileage limitations.
The penalties for going over these vary dramatically. A VW Golf will cost 4.4p for every mile you go over 10,000, the similar Eos is 7.2p. Other manufacturers will charge more than twice that per mile for exceeding lower mileages.
As future value is key, so is the car's condition. Smoking in it, chewing gum stuck to seats and tatty trim will all diminish the car's re-sale price and could be deducted from the car's value at the end of the contract.
Consider the length of the agreement, too.
When you have signed up for 43 months, it's complicated and potentially expensive to walk away if you suddenly want a change.
COMMON CAR FINANCE ACRONYMS
APR: The Annual Percentage Rate is the real cost of borrowing money and includes interest and charges. The lower the APR, the cheaper the finance deal.
GAP: Guaranteed Asset Protection insurance covers any shortfall if the car is written off and the insurance doesn't cover the outstanding finance.
GMFV: The Guaranteed Minimum Future Value (also called a balloon payment) is what the car is worth at the end of the finance agreement.
PPI: Payment Protection Insurance has been sold and mis-sold alongside finance deals for years.
RV: Residual Value, or how much a car is worth after a defined period; often expressed as a percentage of its retail price when new.
WLC: The Whole Life Cost of running a vehicle for a defined period.
CASE STUDY: DACIA DUSTER AND VOLKSWAGEN UP
These are current deals available for cars with a similar list price.
Monthly payments are larger for the VW, yet there's a much smaller deposit to pay up-front.If you choose to retain the car at the end of the contract period, the total amount of money you pay is similar. Hand the car back after four years, however, and the Up will have cost £7,063 whereas the Duster will have cost £8,112.
Duster Access 1.6 105 4x2
List price: £8,995
Initial payment (deposit): £3,112
Monthly payments (48): £99
Interest rate: 8.67% (fixed) p/a
Arrangement fees: £248
Final payment: £2,603
Total to buy outright: £10,715
Total monthly cost if bought outright: £223
Total monthly cost if not bought outright: £169
Up 1.0 60 Move Up 3dr
List price: £9,425
Initial payment (deposit): £942.50
Monthly payments (47): £132.30
Interest rate: 5.1% (fixed) p/a
Arrangement fees: £185
Final payment: £3,629
Total to buy outright: £10,975
Total monthly cost if bought outright: £234
Total monthly cost if not bought outright: £150
