Welcome to another Motors How to Car feature. Now, in Episode One – which you can check out here – we looked at how to choose the make and model of car that you want, taking into account a number of different requirements and factors.
However, let’s say you’ve picked your car. It’s the right colour, in the right spec and has those all-important heated seats, but now comes to the crunch part – how should you buy it?
And while car finance might not sound like the most exciting of topics, it is one of the most crucial ones in the whole car buying process. We’re going to make budgeting sexy – so let’s get started right away.
Cash is one of the oldest and most widely-accepted ways of paying for a car. Dealers and private buyers both accept cash, meaning that it’s got a universal appeal. But what are the benefits? Well, paying for a car with cash means that it’s ‘yours’ straight away – there are no finance payments to deal with. From there, you can do whatever you want with it and sell it whenever you see fit.
However, few people can pay for a car in full, while a large lump sum might be better spent elsewhere. Opting to finance a car instead could see you in the same model but at a more affordable price with payments spread out over a longer, more manageable term.
Monthly payment plans
Monthly payment plans have soared in popularity as they’ve allowed people to get into new, cleaner and more mechanically reliable cars without having to foot one large bill. There are two main options:
HP – or Hire Purchase – sees you paying an initial deposit and then equal monthly payments which spread the overall cost of the car over a period of two to five years. At the end of this period, you’ll have paid off the full cost of the vehicle, meaning it’s then officially ‘yours’.
PCP – or Personal Contract Purchase – is another finance option. Similar to Hire Purchase, you pay a deposit followed by monthly payments across two to four years, but there is an option to pay a final lump sum (or balloon payment) to own the car outright. If you don’t want to do that, you can hand the car and keys back or trade yourself into a newer version with the dealer.
Then, there’s leasing or PCH (Personal Contract Hire). The best way to look at it is like renting – you pay an initial deposit which is followed by equal monthly payments along the term of a ‘contract’. Then, when this comes to an end, you hand the car and the keys back and it’s replaced by a new model should you want to upgrade.
This option gives you the ability to ‘have’ a new car every few years. They’re also often covered by – or available with – maintenance plans, which take more of the strain out of vehicle ownership.
A personal loan offers yet another option. This sees you borrowing money from a bank or lender, which you then use to buy a car outright. You then repay this amount back to the lender. It means you own the car outright even when you’re still paying it off.
However, you’ll have to carry on the loan repayments even if you sell the car..
So we’ve taken a look at how to pay for a car, but what about the optional extras that you often get offered at a dealership. Here’s our run-down of the some of the main ones:
Gap insurance provides an extra level of protection when you’re buying a car. If you buy a car worth £15,000 and it’s written off in an accident six months later, then the insurer would give you, for example, £12,000 after taking depreciation and other factors into account. Gap insurance covers the remaining amount, allowing you to then buy a car for the original amount.
A warranty can be a great extra for those who don’t want to worry about anything on their cars going wrong. If there’s a mechanical issue with your car, then a warranty will often cover both the cost of the repair and the labour costs too. However, they won’t cover all aspects of car repair – so check out the individual policy’s terms when opting for a warranty.
That said, even if you don’t purchase a warranty from a dealer, that doesn’t mean that the option is closed. There are many third-party independent warranty providers which you can contact directly for cover. After you’ve bought your car, then all you need to do is get in touch with one and, for a monthly or annual fee, they’ll provide mechanical cover for your car. Just make sure, as before, that you double-check which aspects of car maintenance they’ll provide coverage before.
Servicing plans are a way of spreading out the cost of maintaining your car. You simply make monthly repayments which then combine to help out when you need your car servicing, helping avoid being hit with one large servicing bill.