In recent years there's been a significant shift in the way people buy cars: increasingly, drivers are opting to use some form of finance deal when they want to get a new vehicle.
These credit packages include hire-purchase agreements as well as long-term leases and a new form of finance called personal credit purchase (PCP), which has become hugely popular.
The main reason for the rise of credit in car purchases has been the low interest rates in the UK since the financial crisis of almost a decade ago. This means that motorists can make relatively low monthly payments to get their hands on a car they might not otherwise be able to afford. For example, the five most popular vehicles at leasingoptions.co.uk are: Range Rover Evoque, Hyundai Tucson, Audi A5, Mercedes A Class and Kia Sportage.
How the different finance deals work
The main differences in how these three main types of credit packages operate concern the ownership of the vehicle at the end of the loan period.
• Hire-purchase deals involve paying an initial deposit followed by fixed monthly payments over, for example, three years. At the end of this period, the car’s ownership passes to the customer provided all the payments have been made.
• Leasing agreements (sometimes called contract hire) involve monthly payments being made over a pre-agreed period. At the end, the car goes back to the dealer or manufacturer – although the lease can be extended. Often, an initial deposit will be required.
• PCP is a sort of hybrid of these two approaches: customers pay an initial deposit plus monthly repayments, but at the end of the term, they have the option to make a final lump-sum payment – known as a balloon payment – in order to buy the car outright.
Pros and cons of leasing or finance against buying upfront
There are a number of potential benefits of taking out some form of finance in order to buy a new car. Firstly and most obviously, you don’t have to part with as much cash in the first instance.
However, if you've retired and have a reasonable level of savings in the bank or accessible from your pension, this may not be such a great advantage.
So what other plus – and minus – points are there?
• By leasing a car over two or three years, say, you’re not tied in to a single vehicle for a long period. For older people whose needs may change over time – not just in terms of accessibility but also with regards to family developments such as having grandchildren – this can be a significant advantage.
• Leasing is likely to be cheaper per month than hire-purchase or PCP as there is no ownership element involved. However, the disadvantage is that you'll have nothing to show for your efforts once the lease term has ended.
• Finance deals can include some form of maintenance package – at a small extra cost – which means you should not be hit by unexpected repair or service bills. If you choose a brand-new car, it should remain within the manufacturer’s three-year warranty for most or all of the loan period. If you buy a car outright, you're responsible for all the bills.
• With a leased car (or a PCP deal if you choose not to buy the car outright at the end), you won’t face the hassle of having to sell the vehicle if you want to change it.
• Leasing and PCP deals mean you don’t have to worry about the impact of depreciation.
With such a range of options to choose from, it's worth taking your time and weighing up the benefits to choose the one that suits you and your finances.
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