Guide to explaining car finance deals?

Makhaira

Makhaira

Makhaira

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I'm just dipping a speculative toe in the water here, but really don't know much about car financing.

I know various manufacturers and dealerships offer their own schemes, but I don't really get the details of the pro's and con's of some of them. I was wondering if anyone knew a reliable and unbiased place to read up to get a bit more understanding? I'm always skeptical of just using sales websites to learn from!

Cheers.
 
It's really quite simple - there will be three main ways of financing a vehicle through a dealer.

a) Personal Lease. This is just renting the car. It's purely a long term hire car, at the end of the hire period, the car goes back and you walk away. You cannot buy the car. It is never yours. You just borrow it. This isn't really finance, its just a rental.

b) Personal Contract Plan. This is sort of like renting the car. You finance the full cost of the car less any deposit but much of its value is held back until the end of the agreement as a 'balloon' or 'guaranteed future value'. You then pay the rest monthly until the end of the agreement. At the end you either hand the car back and walk away or pay the balloon and keep it.

ie

£20k car. £10k ballon.

Interest is paid on £20k over the term, but the monthly payments are just based on the £10k difference between value and baloon.

The main advantage of this is that it gets people into a car they could otherwise not afford. Dealers love it because most people only care about monthly payments and ignore total cost of ownership. PCP has the lowest monthly payments because the amount you are paying off is a fraction of the amount you'd otherwise pay off. But typically of the proper finance packages it has the highest overall cost.

c) Hire Purchase. You pay off the value of the car less deposit over the term and at the end of the agreement the car belongs to you. Nice and simple. Higher monthly payments than PCP but less total cost of ownership and at the end you have... a car that you own.
 
[TW]Fox;25771449 said:
It's really quite simple - there will be three main ways of financing a vehicle through a dealer.

a) Personal Lease. This is just renting the car. It's purely a long term hire car, at the end of the hire period, the car goes back and you walk away. You cannot buy the car. It is never yours. You just borrow it. This isn't really finance, its just a rental.

b) Personal Contract Plan. This is sort of like renting the car. You finance the full cost of the car less any deposit but much of its value is held back until the end of the agreement as a 'balloon' or 'guaranteed future value'. You then pay the rest monthly until the end of the agreement. At the end you either hand the car back and walk away or pay the balloon and keep it.

ie

£20k car. £10k ballon.

Interest is paid on £20k over the term, but the monthly payments are just based on the £10k difference between value and baloon.

The main advantage of this is that it gets people into a car they could otherwise not afford. Dealers love it because most people only care about monthly payments and ignore total cost of ownership. PCP has the lowest monthly payments because the amount you are paying off is a fraction of the amount you'd otherwise pay off. But typically of the proper finance packages it has the highest overall cost.

c) Hire Purchase. You pay off the value of the car less deposit over the term and at the end of the agreement the car belongs to you. Nice and simple. Higher monthly payments than PCP but less total cost of ownership and at the end you have... a car that you own.
Click to expand...

This is a handy post seeing as I wasn't sure of the real differences between B and C. Thanks.
 
Cheers Fox, that's nice and succinct. PCP seems to fall into an odd area though - if you weren't going to pay the balloon payment, then you'd surely just lease to keep the monthly payments down. Equally, if you were going to pay the balloon payment, why wouldn't you just pay the higher monthly payments on a Hire Purchase? (I'm assuming that since the income has to come in over time, the higher monthly payments would just be saved by the individual to pay the balloon).

If I've understood you right, the only time PCP would make sense is if a) you don't know what your plans are, or b) you're expecting a chunk more money to fall into your lap during the term?

Cheers!
 
maccapacca said:
If you pick a car you really like there are often better Personal Lease deals outside the Main Dealer network.
Click to expand...

There are rarely better personal lease deals, it is typically the most expensive way of having a car. Just because the odd bonkers deal gets highlighted on the internet doesn't mean there are often better deals. Remember a lease cost is set based on the residual value of the car plus profit for the lease co..
 
Makhaira said:
Equally, if you were going to pay the balloon payment, why wouldn't you just pay the higher monthly payments on a Hire Purchase? (I'm assuming that since the income has to come in over time, the higher monthly payments would just be saved by the individual to pay the balloon).
Click to expand...

The reason most people go for PCP in this situation is because they are unable or unwilling to pay the higher monthly payment a HP would require. This is why so many people seem to have S-Line diesel Audi's - because the payments on a PCP are quite low. They wouldn't have them if they had to use HP...

Leasing is also ultra-fixed. Its very hard to get out of a lease if your circumstances change. Whereas you can chop in a car under a PCP and take out another one. It adds cost, often big cost, but it's seen as 'easy' and the 'only monthly payments matter' brigade are happy with that.
 
Interesting. It sounds like PCP coupled with a warranty package is actually a fairly predictable way to manage a car then, with the balloon payment meaning that as long as you can cover the payments you're not putting yourself at financial risk if circumstances change.

I've always been somewhat skeptical of anything that is on finance as I'm firmly a "don't live via credit" sort of person. That said, there are some good looking deals offered through my work, hence me testing the water a bit.

Thanks for all the replies, looks like I'm not the only one with this gap in my knowledge at least!
 
Steve2000 said:
There are bank loans as well if circumstances permit. These can sometimes compete with or even beat dealer finance.
Click to expand...

I would go so far as to say it will almost always be cheaper to use a bank loan and a sensible deposit. If a dealer is offering bonkers cheap finance its usually built into the price of the car..
 
Makhaira said:
Interesting. It sounds like PCP coupled with a warranty package is actually a fairly predictable way to manage a car then, with the balloon payment meaning that as long as you can cover the payments you're not putting yourself at financial risk if circumstances change.
Click to expand...

Personal lease may work out cheaper then PCP. Especially if you plan to change car every 2/3/4 years.
 
Unless you get one of the rare (but out there) bonkers lease deals, usually subsidised by manufacturers in some way, personal lease probably won't work out cheaper.
 
Is it possible to get PCP finance from a used car dealer?

I've always just bought used cars using as bank loan, so was just wondering if people did that or if it's only for new cars?
 
Or not.

Broadspeed will sell you that car with Navigation for £16800. A 2 year old example has a private sale value of £12000.

So potentially almost £2k cheaper than the lease at this stage.

It's not magic, a lease cost is a product of the cars expectated depreciation. Nobody makes money by buying a new car, renting it out for less than it'll lose in 2 years and then selling it on at a loss.

Occasionally somebody with a bigger interest than financial, perhaps a manufacturer pushing volume or something, will subsidise a deal but 99% of the time, the lease is the depreciation+somebodies profit. You pay for the convenience.

It seems cheap M135's have gone to everyones head..
 
Greenja said:
Is it possible to get PCP finance from a used car dealer?
Click to expand...

Yes, main dealers especially. Generally finance products from independant dealers represent poor value (infact so do main dealers unless you haggle it or they particularly want rid of the car)

I've always just bought used cars using as bank loan, so was just wondering if people did that or if it's only for new cars?
Click to expand...

IMHO bank loan remians the way to go.
 
The additional point for PCP that seems to have been skipped over is that often dealers will offer to take the car back at the end of the term in exchange for a deposit value on your next PCP with them, in an attempt to tie you in to their network long term.
 
You can also voluntarily terminate a hire purchase agreement once you've paid half of the balance. Some people do it when they lose their jobs, or the car has a ridiculous amount of negative equity.

You have to think very carefully about doing it since it may affect your credit record.

EDIT: Experian say that it shouldn't affect your record, but the lender will put "add a voluntary termination flag to the record of the credit agreement on your credit report".
 
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