Car finance options
Lesson number one in car finance these days: a PCP (or Personal Contract Plan) is not necessarily the best way to go. A PCP is a very tempting route to take, not least because it generally has the lowest possible monthly repayments. It also locks in the second hand value of your car, so there are no concerns about depreciation and that value is guaranteed to be enough to clear the value of the finance when you want it to.
However, it’s a little more complicated than that. You see, while the second hand value (known in the agreement as Guaranteed Minimum Future Value, or GMFV) will definitely cover the final ‘bubble’ payment at the end of the agreement, it won’t necessarily also have any value left over and above that amount. It should do and it’s supposed to and that value is designed to act as the deposit for your next car, but it all depends on the vagaries of the second hand car market and values for used cars.
Basically, PCP really works best when you definitely want to trade in your car in three years’ time for another new one, and you're happy to abide by the strict limits placed on mileage and the condition of the car.
For those that like to be a touch more old fashioned there are still very good options to be had with traditional Hire Purchase (HP) finance or with a bank or credit union loan. HP has been around long enough now that we all know how it works, right? You pay a deposit, finance the rest and there may or may not be a final ‘bubble’ payment at the end. When you’ve paid the last instalment you actually own the car, although in the interim you don’t have any restrictions on mileage or condition. You also don’t get a guaranteed residual value, and with depreciation being the biggest cost in motoring, that’s worth remembering. Interest rates are usually slightly higher on a HP deal than on a PCP offer too, so bear that in mind, although many car makers and dealers are offering zero per cent rates on both for certain models at the moment, so it’s worth shopping around.
A bank or credit union loan is simpler again, and has certain distinct advantages. Yes, it’s likely to come with a higher interest rate and larger monthly repayments than a PCP or HP deal (especially if the dealer has access to a car maker’s own bank, such as Volkswagen Bank or BMW Financial Services, which often offer preferential rates), but you own the car outright from day one, there’s no need to worry about upkeep or mileage and, as you’ll be paying for the car up front, there is often the opportunity to argue a superior discount for yourself, which may even reduce the overall costs versus a PCP or HP.
As ever, remember to approach car finance with great caution. Make sure you’ve ‘stress-tested’ your own accounts to ensure you can afford it now and can continue to do so and either bring a calculator and a pen and paper to work out the overall costs, or befriend an accountant who can do so for you.