Welcome to our new Q&A series How to Car – From those ‘In the Know’, I am Laura Weston and I am here to answer your questions on ‘Car Finance plans’.
With so many options out there to purchase your ‘new’ used car, how do you know if the payment option is right for you? Or could an alternative route be a better option for your financial lifestyle?
Q: Do you know of any finance companies that specialise in electric vehicles?
A:Thank you so much for asking this question, it is actually a really important question that we all need to know the answers to as the UK government have brought forward their ban on new petrol, diesel and hybrid cars to 2035. This means if you want to buy a brand-new car, understanding your options when it comes to electric cars is even more important.
Most branded dealers will have finance companies available for you to use, it should not make any difference if the car is electric or not. You may well get a better deal with a company that specialises in electric cars than the dealer can offer so make sure you explore the options available to you before committing. There are a few companies such as electriccarlease.co.uk but I would not like to recommend directly as it’s personal preference and depends on which car you are choosing. I hope you find a suitable option for your circumstances.
Q: Are there any differences in financing an electric car through a PCP or HP route, to the petrol/diesel equivalent?
This is an interesting question and not that straightforward to answer. Ultimately what happens when you take out PCP or HP is the monthly payments allow a contribution towards the depreciation of the car, leaving you with the balloon payment at the end as well as an initial payment at the beginning to self-fund. Recent research has shown that electric cars hold 49 per cent of their value in comparison to 40 per cent on a regular car so you could argue that a PCP/HP agreement should be cheaper for an electric car for this reason alone. However, unless you do a direct comparison and have a like-for-like example it is exceedingly difficult to share the differences. As far as choosing a finance company for your car, there are finance companies that specialise in electric cars, but I would argue if a dealer is selling a wide range of cars, then their finance options should suit the wide range of vehicles for sale. As you are asking around financing an electric vehicle, I would also like to remind you that you may find there are many other financial benefits to buying an electric vehicle, like no road tax, so I would urge you calculate the whole value of the purchase when you are comparing an electric vehicle to a petrol/diesel equivalent. I really hope this answers your question.
Q: How much do electric cars cost to charge?
A:Depending on how many miles you do, this is where having an electric car is a no brainer and certainly is a lovely sweetener to the additional fact that they produce no emissions and are more environmentally friendly.
Let us take an average electric car, Nissan Leaf, as an example. This car takes around 6 hours to charge when plugged in at home. So, if we assume your energy charges are 0.14p per kilowatt per hour then this car cost £5.60 every 140 miles, this works out at 4.1 pence per mile. If you compare that to the cost of using petrol to energise a car, you are saving 10.1 pence per mile. It means the savings are immediately clear.
Of course, recharging your car away from your home will be slightly more expensive but not on the same scale as a petrol or diesel car. Another point to mention here is that the government has a grant available for anyone considering setting up a charger at home, and they will contribute up to 75 per cent of the cost of buying and installing the charger, up to a maximum of £500. The charging cost is often the element potential buyers don’t understand so I really appreciate you asking this question.
Q: Can I cancel my finance agreement early or pay the lump sum off early?
A: I’m so pleased that you asked this question before going ahead with making any over payments. Every credit agreement will be different, so you need to review your individual document to find the answers. If you don’t have your copy, then the lender should be able to share it with you. All too often it is possible to make an early repayment or lump sum payment, normally there is a charge or small penalty. This needs to be added into your calculations, if this charge is higher than the overall interest you will pay then you might like to hold onto the funds until the end.
The other element to consider with repaying early is whether this is the highest interest charging credit agreement you hold. Car finance is typically a much lower interest rate than other facilities such as personal loans or credit cards so if you hold some of these products then you might be better off keeping the finance agreement going and placing your funds towards something with a higher interest rate. This is called debt avalanching – repaying the highest interest debt first.
Whatever you choose to do, it is a great position to be in where you can repay your debts early and please remember that when you do repay any kind of debt, a best practice is to put that normal payment into the next highest interest debt or if you’ve finished repaying debt, then save that money towards an emergency fund to avoid using credit facilities in the future.
Q: I have just started a new job after being made redundant due to Covid, and for my new job I need a car. Will it be hard for me to get finance to help with the payment as I have not been with my new employer long?
A: Congratulations on your new job, it’s always exciting when you have a fresh start somewhere. Most lenders will start off by looking at your credit history, therefore this is the best place to start. Reviewing your credit report before you apply, making sure everything is present and correct is of utmost importance. Next up they may ask you for a payslip which you probably have not had yet. Ask the question in advance, maybe a contract would be just as suitable. Just be warned, sometimes probation clauses can be a problem for some lenders and create a negative impact.
Making a conscious decision about applying, weighing all of these things up, can be invaluable as a rejection for car finance can be very damaging to your credit score. It might be that once you’ve reviewed these elements, you decide to hire a car for a few months to give you time to build up your credit score, come out of any probationary period and have some payslips as evidence of your income. Well done for thinking about this in advance of making an application, it’s very wise.
Q: What happens if I buy a car with outstanding finance?
A: I would strongly advise against buying a car with any kind of finance still attached to it, ultimately that finance is still tying the previous owner to the vehicle and if you now own it there becomes a liability issue. If finance payments are owed on a car, then the car still belongs to the finance company. Ultimately if you buy a car with finance still attached then you will also inherit the debt still associated with it – this will become your responsibility to settle the debt. Don’t panic too much though as it’s actually illegal to knowingly sell a car with finance still attached so the chances of this happening are very slim.
There are lots of websites you can use to check the vehicle simply with the registration plate, but I would highly recommend this one. You need to be sure that any previous finance is finished or settled before you agree to buy that car; seeing proof of this and checking the registration plate is the best way to be sure this has been completed. Do not accept any written confirmation paperwork, the finance needs to be cleared on the electronic system attached to the registration plate. This is a common concern for anyone buying a second hand car so I hope this gives a bit more clarity around the situation.
Q: Could you please tell me what is the difference between PCP and HP finance?
A: Great question, thank you for asking as the jargon around this often puts people off. PCP stands for Personal Contract Purchase, it’s similar to HP finance whereby you make a monthly instalment but the difference being the structure of the overall finance.
With PCP you will often make monthly repayments over three or five years and then at the end of the term you have the option to make a ‘balloon’ payment in order to own the car or you can just hand the car back. For this reason, most people use PCP as an opportunity to change their car every few years but of course this will mean you are always paying monthly for your car.
With HP finance your monthly payments are paying off the credit facility, so at the end of the term you will own the car. You tend to start with a deposit and then the remaining cost is spread over monthly payments. At the end of the finance you will own the car so it will be your choice if you want to trade the vehicle in or keep it. Bear in mind that the car may have depreciated in value.
When you are considering both options some of the questions to ask yourself are, do I want to own this car at the end of the term? Can I afford to start saving towards a ‘balloon’ payment or new deposit at the same time? Will having a monthly car payment affect my other money choices in the long term.
I believe it’s personal preference as to which option you choose based on your personal circumstances, your car requirements and what suits your financial position now and in the future.
Q: I have finance on a car I bought a couple of years ago and now I want to upgrade. I am looking to purchase a more expensive car and was wondering how this works for finance – will I add the remaining cost of my old car to the new finance plan? Is it best to stick with the same supplier for an easy transition?
A: Most dealers will be able to give you a trade-in price for your car considering the finance that still needs to be repaid on it. Getting a settlement figure in advance of trading-in can be helpful for this conversation. Your finance agreement is linked to you and that particular car, so if you choose to part exchange then the finance would be repaid, and you’d start a new agreement for your new car. Going back to the same supplier can make your old car more desirable as they know the car’s history and may have more confidence re-selling it, but this of course will directly impact your choice of new car.
Another option I would recommend would be to repay the finance so that you own the car. This way you can sell it for the highest price, either privately or through the original dealer, and then start over again with your new car. If you do not have the cash savings to do this now, then you could borrow the money temporarily on a personal loan until the car is sold. This way you will be able to sell the old car at the highest possible value without having finance attached to it.
Q: I’ve been turned down everywhere for car credit. I really need a car and can afford £50 per week, what can I do?
A: That is a real shame that you have had that experience. I would suggest the first thing you need to do is understand why you have been declined. Review your credit report, what is stopping them from lending to you? You are likely to find that you either have a negative remark on your report, maybe you’ve missed a payment, or it may just be as simple as your credit score being too low. Once you know the full situation you can work on building that credit score back up and finding lenders who would be willing to lend you some money to fund a car.
Depending on what shows within your report you may find that to access funds you will have to use a lender who charges a higher interest rate, in which case you may choose to wait 6 months and see if you can build your credit score to open up some more low cost opportunities. Once you know your credit score you can then start working on where the best place will be to borrow the money. Credit score websites will often suggest great places to borrow funds based on your individual report.
Please also consider the overall cost of maintaining a car within your budgeting, so planning for insurance payments, replacing tyres over time, and paying for an annual service/MOT plus building a pot of money to pay for any ‘wear and tear’. This is often forgotten when thinking about the cost of paying for a car.
Q: I am currently saving for a house but also really need a second car as our family has grown. Do I a) take some of my savings from my house fund and have a larger down payment on a used car, but then my own home is further away or b) leave the house fund alone and have a larger monthly payment for the car. Will the extra outgoings for my car finance affect my credit score for a mortgage?
A: I’m so pleased you have had the foresight to take this into consideration, as most people wouldn’t think twice so you’re already a step ahead. Any monthly credit payments will affect the total amount available to you on a mortgage, so in an ideal world you want to keep any monthly credit payments to a minimum. Car payments in the hundreds of pounds can have quite a big effect on mortgage offers, it could be as much as £80k-£100k reduction difference in lending. In addition to that, any credit checks made six to 12 months prior to a mortgage application could have a negative effect on your credit score, especially if you are declined for credit and unfortunately, you’re not going to know the chance of this until you make the application. A better option may be to buy a less expensive car, use some of your house savings, aiming to not take any car finance and then top the difference up for the house purchase, with one of the many First Time Buyer or 95 per cent mortgage schemes available. Best of luck in achieving your goals and well done once again for making this consideration.
Q: I purchased my car a few years ago on PCP. When the agreement comes to an end, I have 3 options: 1) pay the final payment and own the car, 2) return the vehicle OR 3) part exchange the vehicle.
Which is the most financially viable option in the long run? Considering I would need to maintain an older car with option 1 which may have costs associated and having already paid money for it each month. Or if I hand it back, I don’t get any more for it to buy a new one. Is option 3 the best one perhaps?
A: I think the real questions to ask yourself are, how does my current car support my future requirements? If I make the balloon payment, will I miss out on other money goals I want to put that money towards? This really is personal preference based on your lifestyle and requirements so you may get benefit from reviewing this situation with a financial expert.
Consideration to owning this car is only really appropriate if it fulfils your needs for the next five to seven years and you can make allowances for the cost of running an older car. As you have said, considering the ongoing cost of running a car is an important aspect a lot of people forget about. Making an allowance for a yearly service, MOT, tax, insurance, any repairs required to the car and changing the tyres every few years can be expensive, so saving for these costs on a monthly basis is a best practise. Of course, these figures may be higher for an older car. This is often something forgotten about when committing to a car; it’s not just the monthly price tag that needs budgeting. Returning the car could be a costly option depending on any damages and the mileage so with that in mind, part exchange seems like a sensible option but please remember all the additional costs that come with running a car along with your future requirements for a vehicle and other money goals you may have.
Q: I am 18 and a first time buyer and I am looking for some finance options available to me – this will be my first time taking finance on anything (does this affect my chances as I have no credit history?)
A: Firstly, well done on having an awareness around your credit score at 18 years old, most adults have never considered or looked at their credit score even though it’s probably their most important asset. You are absolutely right to protect your credit score as it will really help you unlock many doors as you continue to move into adulthood. The chances of you obtaining car finance are very slim with no history. I would suggest spending the next six to 12 months building your score up before applying for car finance. There are a few simple ways you can do this:
– Review your credit score on a monthly basis, check everything looks correct and analyse if it’s gone up or down.
– Apply for a credit card with a reputable bank, maybe alongside your bank account would be the best option. Use it on a monthly basis but plan to pay it off each month. An additional way to increase your score is to never spend over 30 per cent of the limit and paying it off over two payments will boost you up even further.
– Make as many of your monthly payments automated on direct debits and standing orders. Any payments outside of this do not help build your score in the same way.
– Ensure you are on the voters roll at your home address and don’t change address on your bank account unless absolutely necessary. If you choose to go to university, keep your address as home and add a correspondence address for your university address if need be.
– Use facilities such as a catalogues and mobile phone contracts to have small credit agreements with, as this proves you can borrow money and pay it back.
I’m so pleased this is already on your radar. Please talk to your friends about it as awareness around this subject within your age range needs raising. Your credit score is your most important asset, therefore it needs nurturing, reviewing, growing and maintaining.
“After enjoying a 20 year career with the one of the World’s Largest Banks, Laura is founder of a financial coaching business, Savvy Peacocks. Laura is also a co-parenting mother to 3 children and a puppy so it’s a good job she works best when she’s busy! Savvy Peacocks support families to break down the taboo subject of money within the home through a collaborative learning approach for both parents and children. They have a mission to increase financial literacy across the UK through our future generations working with children as young as 5 yr old up to 21 yr olds.
July 26, 2021