Financing a personal vehicle – all of the options explained

After housing, buying, and running a personal vehicle is the biggest expense that most people face. Affording one is a challenge. But unless you are lucky  enough to live somewhere with public transport that runs several times an hour and is cheap you need one

Financing is your biggest cost

Car repayments typically represent over 50% of the cost of running a vehicle, so it makes sense to work to keep that cost down.

How most people finance their vehicle purchase

In the USA and the UK, the two main vehicle financing models are:

•     Hire Purchase (HP)
•     Personal Contract Purchase or Personal Contract Plan (PCP) which in the USA and many other countries is called leasing

There are other forms of finance available, but they are typically just a variation of these two models. For example, bad credit HP is usually just a standard Hire Purchase agreement that may have to be secured against another asset or co-signed by a friend who has a good credit score.

How HP works

With an HP deal, you are lent money at a certain APR. How much interest you will pay in total is added to the cost of the car, minus any deposit you pay upfront. That total is then divided by the term of the contract, typically between 12 and 72 months to determine the amount you pay per month. Provided you make all of those payments the car is yours at the end. The lower the APR, the less the loan will cost you.

The pros of HP:

•       Easy to understand
•       You own the car outright at the end of the agreement
•       No mileage restrictions
•       No danger of having to pay for excessive wear and tear

The cons:

•       Higher monthly repayments
•       A larger initial deposit may need to be paid compared to a PCP

How PCP works

A PCP is more flexible. You also pay the loan back in monthly payments, but the amount is typically lower than it is with an HP agreement. As a result, at the end of the contract, you will need to pay a balloon payment to clear the debt and become the full owner of the car. But you are not obliged to do that. Instead, you could simply hand the keys back, refinance, or trade that vehicle in for a newer model that you can buy/lease using a new PCP arrangement.

PCP pros:

•       Potentially lower monthly payments
•       Flexibility to trade, buy, or renegotiate a new deal at the end of the contract
•       Potential for lower interest rate

PCP cons:

•       The total cost of the deal can be higher than for HP
•       Mileage restrictions
•       Wear and tear clauses
•       No outright ownership until the balloon payment is made

Use your credit cards

Using credit cards for other purchases to free up cash to put towards buying a family vehicle can also work. But, again, if you do not pay the monthly minimum the interest payments will quickly add up. Unless you are good with money and very disciplined this option is usually best avoided.

Borrow from a bank or credit union

If you have a good credit score getting an unsecured loan from a bank or credit union may be possible. Shopping around will help you to get the cost down, but always look at what the full cost of the loan will be. Also, bear in mind that you may not get offered a discount by the dealership if you buy using cash borrowed from a bank. They often cut the price to sweeten the deal to tempt you to buy using the finance they recommend.

Always compare the deals on a like-for-like basis

When buying a car using credit, don´t just look at how much the monthly payments will be. Always calculate how much buying the car is actually going to cost overall. Add up the monthly payments plus any admin fees or additional charges that may be made. Once you have that final figure you can compare it with the same figure for each financing option.

Always read the small print

Finally, always check the small print. This will make you aware of anything that could result in your being asked for more money at some point. It will also help you to understand what will happen should you fail to make a payment.