Car Finance Options Explained
So, you have made the decision to finance your next car, however, now you need to decide which type of finance is the most suitable for you.
The decision is largely based on whether you will be using your car for business or personal use, whether or not you would like to own the vehicle at the end of your agreement and if you are happy to limit your annual mileage.
We will go through each finance product in detail but to save you time you can use our quick guide to help you:
PERSONAL CONTRACT PURCHASE
Increasingly popular, especially where people are opting out of company car schemes, Personal Contract Purchase (PCP) is one of the best ways you can purchase a new or used car.
The initial deposit and monthly payments are lower than conventional Hire Purchase. Based on mileage and age, your car's guaranteed future value is calculated and then deferred as a 'balloon' payment at the end of the agreement.
Your payments are spread over the agreed period, between 24 and 48 months, and at the end of the agreement you have much greater flexibility with a final ‘balloon’ payment of the residual value and a choice of four options:
• You buy the car by paying the ‘balloon’ payment, the residual value
• You can part-exchange the car for another vehicle
• Sell the car privately and pay the final ‘balloon’ payment
• Return the car with, subject to mileage and condition, nothing more to pay (subject to terms and conditions)
What to do first?
Determine your annual mileage. The estimated future value and final guaranteed ‘balloon’ payment is then calculated, together with your monthly payments. You can then decide if the PCP is best for you.
What are the benefits?
• Low risk with the minimum future value guaranteed (subject to terms and conditions)
• Low deposit keeps your valuable personal or business cash available
• Low fixed monthly payments, perfect for budgeting
• Fixed interest protects you from interest rate fluctuations
• A better car with lower payments allowing you to choose a higher specification car
• Greater flexibility at the start and end of the agreement
• Tax benefits for business users when you opt out of a company car scheme
• No VAT to pay
What about excess mileage?
At the beginning of the agreement you determine your annual mileage for the contract period. If you decide to return your car to the finance company you simply pay a fixed amount per extra mile.
What about ‘wear and tear’?
At the end of the agreement the vehicle may be worth more than the agreed residual value if it is well maintained. It is in your own interest to minimise the vehicle’s ‘wear and tear’.
Finance packages are subject to status and finance company acceptance. UK residents only.
HIRE PURCHASE
Hire Purchase is one of the simplest ways of funding your motor vehicle.
It offers fixed monthly payments with fixed interest spread and repaid over the agreed period of 12 to 60 months.
The loan is secured against the vehicle, allowing a greater borrowing limit and HP gives you additional benefits compared to a personal loan.
You decide how much deposit you want to pay, usually between 10% and 50% and financing your vehicle in this way makes budgeting straightforward.
When the final payment has been made, the vehicle transfers to your ownership.
What to do first?
You decide on the amount of the deposit and the term over which you will spread the finance.
What are the benefits?
• Lower deposit keeps your valuable personal or business cash available
• You decide the deposit and the term
• Fixed monthly payment makes budgeting simple
• Fixed interest protects you from rises in interest rates
• Asset – you gain vehicle ownership
• Flexible and doesn’t compromise your other lines of credit
• Tax allowances for business users
• No VAT to pay
Finance packages are subject to status and finance company acceptance. UK residents only.
HIRE PURCHASE WITH BALOON
Hire Purchase with a Balloon offers you greater flexibility compared to Hire Purchase.
At the end of the agreement you have the option of making a final lump sum payment ('balloon') to own your car.
It is fixed rate finance with lower monthly payments because you defer repayment of some of the borrowing.
The deposit you pay is flexible, typically between 10% and 40% of the vehicle cost and the deferred balloon payment is calculated on the estimated future resale value of the car.
Payments are usually spread over 12 to 60 months.
At the end of the agreement your options include car purchase, refinance, part exchange or resale.
What to do first?
Determine your annual mileage. The estimated future value and final guaranteed ‘balloon’ payment is then calculated. You agree a deposit, your term and monthly payments.
What are the benefits?
• Lower deposit keeps your valuable personal or business cash available
• Lower fixed monthly payment makes budgeting simple
• Fixed interest protects you from rises in interest rates
• A better car with lower payments than standard Hire Purchase, allowing you to choose a higher specification car
• Asset – you gain vehicle ownership
• Flexible and doesn’t compromise your other lines of credit
• Tax allowances for business users
• No VAT to pay
What about excess mileage?
There is no mileage restriction.
What about ‘wear and tear’?
At the end of the agreement the vehicle may be worth more than the agreed residual value if it is well maintained. It is in your own interest to minimise the vehicle’s ‘wear and tear’ to help its resale value.
Finance packages are subject to status and finance company acceptance. UK residents only.
CONTRACT HIRE
Contract Hire is ideally suited to companies and individuals registered for VAT.
Up to 100% of VAT can be reclaimed provided there is no element of personal use.
Up to 100% of the rental cost can be offset against taxable profits
If the vehicle is used personally then this figure drops to 50% and the vehicle is hired for an agreed period of time, usually between 12 and 60 months and a rental is paid based on a pre agreed mileage.
Contract Hire can include full maintenance including all consumable items such as tyres and brakes etc.
At the end of the contract the vehicle is simply returned to the provider. You have no disposal hassles or depreciation risks.
Key Benefits of Contract Hire
Road Fund Tax Vehicle Excise Duty for the period of the contract is included in the contract and will be sent to you automatically
Fixed Monthly Rentals: The agreed rental remain constant throughout the contract allowing easy budgeting
No Depreciation Risk: The supplier owns the vehicle, you have no worries about depreciation and re-sale value, subject to fair wear and tear provisions.
VAT Reclaimable: 100% of the VAT is reclaimable on commercial vehicles or cars when used purely for business. 50% of the VAT is reclaimable on cars when used privately. 100% VAT reclaimable on the maintenance contract (LCV & Car, regardless of use).
Off Balance Sheet Funding: Because it is a rental agreement, the cost sits off balance sheet. There is no asset depreciation that might adversely affecting your gearing.
GAP INSURANCE
Most of us think our Comprehensive Motor Insurance covers us if our vehicle is written off...
THINK AGAIN! If your vehicle is written off your motor insurer will only pay the current market value for your vehicle!
So what happens if the current market value is not enough to replace your vehicle or pay off your finance or contract hire agreement? Simple, there is a financial Gap that you will have to pay out of your own pocket.
What does Gap Insurance do?
Gap Insurance will protect you if you write off your vehicle. Your motor insurer may not pay you enough either to settle any finance outstanding on your vehicle or purchase a replacement vehicle.
Gap Insurance ensures that you are not left out of pocket if you have a total insurance loss, by covering any shortfall between your insurance pay out and the amount outstanding on the finance agreement.
Over half a million cars are stolen each year and most of these are written off or vandalised. Add to that the large number of accidents and you could be the next person to suffer a vehicle write-off. A Gap Insurance policy will cover you against financial loss should your car be stolen and/or written off.
Why should I purchase GAP Insurance?
▪ UK Car Crime is a third of all crime
▪ A vehicle is stolen every minute, 33% of these are never recovered
▪ Cars depreciate by up to 77% over a 3 year period
▪ Motor insurance settlements are always less than the price you pay for your car
▪ When a write off occurs you lose out and have to raise the funds for any short fall
▪ Write-offs occur all too often. Protect yourself
Consider this example:
Original cost of your car £20,000
Deposit £2,000
Amount of loan £18,000
One year later the car is stolen or is in an accident and declared a total loss.
Amount still owing to your finance company £12,000
The insurance company pays you only £7,000
Amount of loan £18,000
At a minimum this leaves you with a financial GAP of £5,000!
Avoid this financial worry. Buy one of the following gap insurance policies:
Contract Hire & Finance Gap Insurance
In the event of a write off this will pay the difference between your motor insurance payout and the amount outstanding on your finance/contract hire agreement. Using the example above it would pay £5,000
Back To Invoice
In the event of a write off this will pay the difference between your motor insurance payout and the original price of your car. Using the example above it would pay you £13,000
Vehicle Replacement Insurance
In the event of a write off this will cover the difference between your motor insurance payout and the cost of replacing your vehicle to the exact specification, even if the price of the new replacement car has increased.
Call us now on 0207 871 2424 for more information about Gap Insurance.
