Advice on buying/financing/leasing a car

SevenOne3

I'm a complete newbie to purchasing/leasing/ financing a car so I would really appreciate if someone could explain to me which option is best and their opinions why.

I could buy a second hand car, that's an option, but is that better than leasing/financing a car? Would really appreciate any advice or wisdom!

(I have a good credit score in case that's relevant to anyone's advice) 

Grumpy_chap

The first thing to assess is why you need a car, how large the car needs to be (passenger / luggage space), how far you expect to drive each year and what type of mileage that will be (city / motorway / country lanes).

Then, what is your budget to buy a car outright or monthly?  Is that budget secure, or are there other obligations that may also need to call on those funds?

Have you considered running costs in the car budget?

You mention not having purchased a car before.  How much driving experience do you have?  If you have only recently passed your test, an expensive car may be less optimal.

Once you have considered those factors, you can then consider the appropriate finance options for your scenario.

Goudy

Paying cash used to be king, but it's not as straight forward as that anymore.
Paying cash you will obviously not pay any interest on any loan but it is not uncommon that taking finance can come with some bonuses which we'll come back to later.

Your cash might be earning you interest but that is usually lower than what a finance company would charge you to borrow that money.
So for example, your cash is earning 3% in a savings account and the finance on a car is 7 or 8% it makes sense to use your savings to buy the car then what you would pay on monthly payments on finance to put back that savings.

There have been expections to this, like 0% finance deals. Though most of those are in the past and did require you to put up around 50% of the purchase price in cash to qualify. 

You could borrow money. There are different ways to do this.
Personal Loan from a bank is self explaining, you borrow money that has an interest rate which you pay back in even monthly chunks until the loan is cleared.
To work out what it all costs just times up the monthly payments over the length of the agreement.
You will usually "own" the car and no one will have any interest in it.


You can take out normal car finance.
Same as the above but the dealer will usually arrange this via a bank, specialist car finance company or sometimes the manufacturers own finance arm. The same even monthly repayment chunks until the loan is cleared fully.
For example, a £20,000 car with £4000 interest over three years will mean £24,000 divided by 36.

The finance company will have an interest in the car until you have paid off the loan. If you want to sell it before you have repaid the loan it will appear on databases like HPi that there is money owed on the vehicle.


Another common type of car finance is call PCP or Personal Contract Purchase.
It is similar to normal car finance but there is a payment that is deferred to the end of the contract that is equal(ish) to what the vehicle will be worth at that time that you have some options with. This is called the GFV or Guaranteed Future Value.
By deferring this GFV is keeps the monthly payments lower than a straight finance loan.

You borrow the whole amount with interest but your monthly payments are not equal.
So for example, you buy a £20,000 car which has £4000 worth of interest on the loan over three years and they predict that car will be worth £10,000 at the end of the contract.
You will pay £14,000 divided by 35 in monthly payments, then on month 36 the £10,000 is due, but like I wrote earlier, you have options with this.
Pay the £10,000 and keep the car.
Hand the car back to the finance company and pay nothing more (except any damaged or excess mileage above the contract)
Trade the car in like any other. If it's worth more the extra goes towards your new car, anything less and you still owe that amount.
Finance companies are pretty good at predicting these GFVs but there is nothing stopping you shopping around and haggling on a new deal to improve on that value.
Again, the finance company will hold some interest in the car until the finance is fully cleared.

There is often bonuses to take car finance, either a straight deal or PCP.
It's usually in the form of deposit contributions and free servicing.
You can take these deals and if you have the cash, pay the finance off right away.
This way you get the bonuses and still pay no interest, but due to say a deposit contribution you would pay less than paying up front with cash.

Going back to the same sort of example.
£20,000 car over three years with £4000 interest, but they give you a £2000 deposit contribution.
That's £22,000 borrowed but if you clear the finance straight way you don't pay the £4000 interest so you actually pay £18,000.

(It's worth stressing, PCP on new cars tends to attrach lower interest rates than on used cars which tend to be much higher, so makes PCP on used cars rather expensive)


Leasing is just renting a vehicle over a longer period. The vehicle will not be yours at the end of the contract. Some manfacturers might call this PCH or Personal Contract Hire.

You will pay a deposit, often 3 months rental up front, then pay a monthly rental fee each month. The vehicle won't be yours and you will have no interest it it's value unless you damage it or go over the contracts mileage.
There are different types of lease, some include maintainence, so don't.
They usually include the road fund license though.

You will bound by the same sort of condition and mileage conditions as a PCP deal.
Anything over that will be chargeable.

Once you know what the options are, you can search around the internet for some better explanations.