FOOL'S EYE VIEW
Smarter Car Financing

By Jane Mack (TMFJane)
June 1, 2004

One of my neighbours was getting all excited the other week because she was about to go and buy herself a brand new VW Beetle.

So I teased her by saying that Jeremy Clarkson had recently described this particular car as so slow he was surprised it was even capable of movement and that it was nothing more than a fashion statement. I also pointed out to her that it would depreciate in value quite significantly the moment she drove it off the garage forecourt.

I don't see the point of spending in the region of £15,000 on a brand new car that'll plummet in value by as much as a third in its first year. If she really must have it, why not go for one that's at least a year old and save herself £5,000? The huge saving must surely outweigh the temporary kudos of driving around in a vehicle fresh off the production line.

There's also the small matter of financing it. Very few people have got a spare £15,000 lying around so it usually comes down to buying on credit. And this is where, if you're not careful, you could get fleeced in a big way. The key is to look at all the options and look at the price you'll pay overall. Consider the following methods:

Hire Purchase

You'll be offered this deal by your friendly local car salesman. You might think it's pretty similar to a personal loan but what you're effectively doing is renting the car for the duration of the HP agreement - usually two or three years. Only after you've made the last payment will you actually own the car so bear in mind that you won't be able to sell it should your circumstances change.  Interest rates are often rather high too so make sure you ask for the total amount repayable so that you can compare the figure with what you'll pay using other options.

Personal Contract Purchase

This is a rather strange hybrid of Hire Purchase which enables you to 'rent' the car quite cheaply for the duration of the agreement. At the end of it, you have the option of stumping up a big lump sum in order to buy the car, or else you simply give the car back.

How much will the lump sum be? Well, it's based on what's called a Minimum Guaranteed Future Value of the car. When you first get the car, the finance company makes an educated guess at what it will be worth at the end of the PCP agreement and that's the amount you'll have to pay at the end. In the meantime you pay 'rent' on the remaining value of the car. Again, interest rates are pretty high.

Leasing

In this instance you never actually buy the car - you just rent it. Usually the maintenance costs and car tax are included in the deal although you have to take out your own car insurance. If you want hassle-free motoring it's a good route to take although bear in mind you'll get nothing at the end of it.

Personal Loans

This is a more cost-effective way of buying a car as interest rates can be about half of those offered through HP or PCP. The car is also yours right from the start and you can do what you like with it.

0% credit card

Depending on your credit limit, this is the cheapest way to buy a car because you're borrowing the money for free. Buy the car with your credit card and immediately transfer the debt to a 0% deal so that all your monthly payments are going towards paying off the car. When the interest-free period draws to a close, switch the debt to a new 0% card and keep switching until you've paid off the debt. You need to be careful with your timing and plan your switches at least a month ahead to allow time for each deal to be set up.

If you're not the sort who enjoys juggling your credit cards in this way, then choose a card that charges a low rate for the life of the balance transfer.

I'm glad to say that my neighbour is still driving around in her battered old Peugot and has decided to re-vamp her kitchen instead. That seems to make much more sense to me - the money she's spending will add value to her home and won't be wasted on a depreciating asset. And she can make just as much of a fashion statement with her kitchen as she could with a car.

More: More Car For Less Cash