Can I afford to finance a new car? Options and criteria for car financing
You want a new car. Except, you don’t want to buy it outright. And, you don’t really want to lease it. What are your options?
Well, you could buy second hand, but you really would prefer a new car. So, that leaves you with a finance option.
One of the questions we get quite often at OSV is, ‘can I afford to finance a new car?’ and the chances are, yes you can.
In this article we’ll talk about your finance options, what you should think about when budgeting, and how to lower the cost of the payments.
What finance options do I have?
If you want a new car to own outright then you can go for a hire purchase. A hire purchase is essentially where you pay for your car monthly. Once those payments have been made, you own the car outright.
You may also want to consider personal contract purchase. At the end of a contract purchase agreement, you have three options;
- Hand the car back (subject to mileage and condition restrictions, obviously)
- Purchase the car for a pre-agreed price (more on this in a bit)
- Sell it to a third party
Because we are talking about buying a car, we’ll only be discussing the second option. However, you can head to our personal contract purchase page for more information on the other two options.[vc_single_image image=”38008″ img_size=”article-image”]
What are the pros and cons of hire purchase?
So, what are the advantages and disadvantages of hire purchase?
Some of the advantages are;
- It’s a fixed rate loan – this means it will unaffected by fluctuating interest rates
- You can reduce the monthly payments by setting up a balloon payment. This is a slightly larger payment at the end of the agreement that pays off the rest of the finance.
- There are no mileage restrictions
- The finance can be settled early if you have the cash to pay the final amount.
However, there are some disadvantages that you will have to be aware of. And those are;
- The monthly payments tend to be higher than if you were to lease
- The finance house still technically own the car until you make the final payment
- Because of this, insurance has to be fully comprehensive until you own the vehicle outright
How is a Hire Purchase price calculated?
[vc_single_image image=”38009″ img_size=”article-image”]The price of a hire purchase agreement is calculated by;
- Taking the full price of the vehicle
- Deducting any deposit you decide to put down
- Any balloon payment you want to pay at the end
- They then take this amount and split it into monthly payments. A hire purchase agreement tends to last anything between 12-60 months.
After that, you own the car.
What are the pros and cons of personal contract purchase?
So, what about personal contract purchase?
Some of the advantages of personal contract purchase are;
- The end payment is pre-agreed, so you know how much you have to save/put aside.
- Because you aren’t paying for the whole car in one go, you can drive a better car for less money than you would expect.
However, there are disadvantages to personal contract purchase, and those are;
- The interest rate tends to be higher than with a hire purchase
- Until you make the final payment, you have to pay for fully comprehensive insurance
- You are responsible for taxing the vehicle
- Until the car is yours, you have to pay to get it serviced
How is the price of a personal contract purchase calculated?
If you want to buy your car at the end of your personal contract purchase, you have to pay the Minimum Guaranteed Future Value (MGFV).
The MGFV is set by the finance house at the beginning of your agreement. It is the amount the finance house thinks it will be worth at the end of the contract. This MGFV is then deducted from the overall cost of the car. Then, the amount of deposit you choose to make will also be deducted. The amount left over will be split into monthly payments.
Are there any hidden costs when financing a car?
When thinking about your budget for your new car, you need to think about extra costs. It must be stressed that these aren’t ‘hidden costs’, they are just extra. They are only hidden if you are not told about them. If you go through a reputable broker or dealer then they will be completely transparent with costs.
Some of the extra costs you need to think about when financing a car are;
- As we’ve mentioned, because the car isn’t yours until you make the final payment, so you have to pay for fully comprehensive insurance.
- You can read about what affects insurance here.
- Servicing costs
- If you have a personal contract purchase, you have to get the car serviced. This is because you still have the option to return the car (even if you aren’t going to)
- While it’s not compulsory when you have a hire purchase, it’s still recommended.
- You can read our article on servicing costs here.
- While it’s not so much an extra cost, it is something you have to think about when budgeting. This can be as much or as little as you like. However, the larger the deposit, the lower the monthly payments.
What should I think about when budgeting to finance a car?
So, what sort of things should you take into consideration when thinking about your budget?
- The cost of insurance
- Fully comprehensive insurance tends to be pricier than third party. Therefore, this could take you over your budget
- Running costs
- This might seem like an obvious one, but your dream car could cost a fortune to run
- The servicing costs
- Servicing can set you back a fair bit so you need to make sure you can budget for that
- You can opt for a maintenance agreement if you want. This allows you to spread the servicing costs across your monthly payments
- You can read all about maintenance agreements here.
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How can I lower the price of my monthly payments?
There are ways in which you can lower the cost of the monthly payments and those are;
- Putting down a larger deposit
- The larger the deposit, the lower the monthlies
- Having a higher balloon payment at the end
- If you have a hire purchase agreement, you can opt for a larger balloon payment.
- Lower mileage
- This only applies if you have a personal contract purchase
- The cost of your monthly payments is affected by how many miles you do, similar to a lease contract
- Therefore, if you go for a lower mileage, you will decrease your monthly payments.
- Opt for a longer contract
- The amount you pay stays the same regardless of how long your contract is. But, if you go for a longer contract, the monthly payments will be lower.
Is there a criteria for financing a car?
There isn’t a set criterion for you to be eligible for car finance. However, the finance house does need to ensure that you can make the monthly payments. Therefore, they will take into consideration;
- Your credit score
- How old you are
- Your income
Of course, if you have a less than perfect credit score, the finance house can’t be sure that you will make the monthly payments. However, you can read our article about getting a car with bad credit here. If you are quite young, then the chances are you don’t have a much of a credit score. You can read about young drivers getting car finance here.