In April, car tax is set to rise. If you aren’t aware, where have you been!? Find out all the details you need to know in our recent blog post - How Will The New Car Tax Changes Affect You?
With major tax increases, now’s the perfect time to buy some new wheels. A car is probably the most expensive thing, after a house, most of us will ever purchase. But, unlike a house, a car’s value will fall over time and eventually you’ll need to buy a new one.
Car price tags can be huge – so how do you go about finding value for money? Well, the key is to think about car ownership purely in terms of a monthly cost. How much do you want to pay each month, and how do you want to pay it?
New Car? – Before we continue, if you are looking at a new car, you MUST check out CarWow.co.uk. This website allows you to specify the car you want and dealers will fight it out to give you the best price. The savings can be huge!
Cash Buyers
Traditionally, people saved up and paid cash for cars. A lump sum is paid at the start, and a small sum will be received at the end when you sell the car. The cost per month is the difference in the purchase and sale price, divided by the number of months owned.
New cars will have heavy depreciation when new, reducing with the age of the car. A car bought new for £18,000 and sold for £9,000 3 years later, will have cost £250/month. But if the car was sold for £5,000 after 5 years, the car will have cost only £217/month.
Buying any car from new, with cash, will benefit an owner who plans to keep the car for a long period of time.
Finance
There has been a recent shift towards finance deals on cars. The most common one is a Personal Contract Plan (PCP). This involves three things:
- An initial deposit
- Monthly payments
- Fixed final value fee
The theory of PCP is that you pay a small amount each month to ‘rent’ the car – basically covering the cost of the depreciation. At the end of the agreed term, you can buy the car outright for the agreed fixed final value fee. So basically, you buy a brand-new car over several years.
There are lots ways of trading lower monthly repayments for a higher final value fee, and vice-versa. However, remember that you’ll still have to pay the same amount of money to keep the car, whether that’s smaller monthly payments and a large end payment or the other way around.
However, most people don’t keep the car. At the end of the agreed term you have three options:
- Return the car and walk away.
- Buy the car by paying the final fixed value fee
- Use any extra value in the car above the fixed value fee towards a new car.
If your car is worth more than the fixed final fee at the end of your agreement, because you’ve not driven as many miles as expected or paid more in monthly payments and opted for a lower final fee, you can use this extra towards the deposit on a new car.
Car dealers love selling cars on finance, because they keep the customer and can sell a new car in a few years. As a result, expect extra incentives such as deposit contributions, free servicing, free insurance, floor mats, free petrol etc.
Remember though – PCP, like all finance options, is a financial commitment. You won’t be able to break the contract if you fall into financial difficulty, so make sure you can afford the repayments.
You can return the car for nothing if you have paid over half the value of the vehicle.
Cash loan
If you don’t want to buy a brand new car, you will find second-hand PCP deals from factory dealers very bad value. The large interest rates are designed to push you towards buying new, rather than second hand. So, what are your options if you want to buy a used car?
Personal loans are worth considering. Loan interest rates are incredibly low at present, with some lenders offering rates as low as 3%. There’s probably no cheaper way of borrowing money to buy a car. Check out Zopa and Halifax.
However, as you’ll be paying back the entire value of the car, expect monthly repayment rates to be higher than PCP. With PCP, you’re only repaying the portion of money between the deposit and final value fee. However, with a loan, you are repaying an equal portion of the total loan each month.
The advantage is that you are left with no final fee – after the last repayment, the car is yours!
Other options
There are a wide range of options when it comes to buying a car. A couple of others to research are car leasing and third party finance deals.
However you finance your new car, take into account the new tax rules and make sure you can afford the repayments.
