Help me understand car finance

charlie_1988UK

My partner is at the end of her lease, and we're handing the car back and moving on as it was a dreadful deal.

I have only bought in cash so I don't know where to begin. She has a budget of about £200/£300 a month and about £3k in savings.

I suggested buying outright but she is hesitant. Where do we even begin please?

Keep_pedalling

Leasing can be very good value if we are talking about a new car, it was certainly the best option with my current car.

Rhyddid2026

I'm not an expert in these matters but if it was me I'd be comparing the APR of car finance and the APR of a personal loan.

Because I am rough with my cars (I do a lot of mileage, have dogs in the car, and go to dodgy places) I'd also check the fine print or any conditions of the car finance.

flaneurs_lobster

There's an MSE guide to financing the purchase of a car here

https://www.moneysavingexpert.com/car-finance/buying-used-car/#finance

Vitor

Start by working out what went wrong with the last deal, otherwise you’ll repeat it.

With £3k saved and £200–£300/month, you’ve basically got three sensible options:

1. Buy a £2–3k car outright and avoid finance entirely, but you're edging towards 'bangernomics'
2. Use £2k deposit + a bank loan for a £5–8k used car (usually the best balance)
3. HP if you want simplicity, but compare the total cost carefully

I’d avoid PCP unless you fully understand balloon payments and total cost.

Frozen_up_north

I agree with Vitor, PCP is where you usually pay a deposit and a monthly amount. At the end of the term you either pay off the balance (usually half the initial cost of the car), or hand over the keys and walk away.

The fly in the ointment is that initial deposit and the mileage and condition of the car when handing it back. For example, you might need a £2000 deposit and then have nothing saved to start another deal after the term.

MEM62

I suggested buying outright but she is hesitant.

She would be very wise to take your advice.

Goudy

Car finance isn't complicated, but you just need to work out the total costs to know what is the best form.

This is a money saving forum, so whatever is the cheapest way into a car is always going to be the most popular way. Buying cash may suit most but not all as your cash budget doesn't stretch all that far these days.

Obviously HP and PCP may suit different people, but both are still loans that acquire interest.

HP is the more straight forward. You borrow the whole cost of the car other X months, interest is worked out at whatever rate they state and you pay back all the capital and interest over those months.

This means your repayments are even over the contract.

PCP differs a bit. You still borrow the whole amount and interest is worked out on all of that but the cars future value is calculated based on months and mileage at the end of the contract. This value, the GFV is deferred until the last month, but you have options on it later.

Now your monthly payments are lower, but you still have this GFV or balloon payment at the end.

All repayments on any form of car finance are pretty linear, but car deprecation isn't. This point when the GFV is due is carefully worked out to meet the point when both the cars value and what you owe meet.

Your options at the end are, just pay the GFV and keep the car. Hand it back to the finance company and if you are within the contracted mileage and the car is without excessive wear and tear, you walk away. Or trade it in for another car just before the end of the contract. If you can negotiate a trade in value higher than the GFV you can use that towards your new car. If it isn't, you still have the option of handing it back to the finance company.

You often get incentives to take PCP. As well as stumping up your own deposit, most PCP deals on new cars have deposit contributions and other incentives like servicing plans. The size of these vary, but some are very substantial and you can sometime qualify for better discounted rates, particularly for public employees.

Generally PCP works out better on new cars that used. Used cars tend to attract higher interest rates and the GFV's can make them work out far more expensive than straight HP as the older cars bottom out in terms of value.

So the best thing to do is look at some deals for similar cars with different forms of finance, then add the total cost up.