Article for Scottish Farmer by Allan Ross
As a car enthusiast I know that buying a car can be great fun days spent in showrooms, looking at the small ads, comparing models, negotiating the deal and then! The joy of delivery! There’s nothing like it, except that is, the first drive
in the new car.
My first car was a Hillman Avenger, I can even remember its registration number. In the heady days of the 1980s, Young Farmers drove RS2000s, Ford Capri GTs and even Audi Quattro's! I wish I had known more about car finance then, for then I might have been able to afford to drive my dream, as opposed to the car
with the "It’s a Secret Disco” tax disc, no heater and complimentary blankets. Happy days!
The Avenger was followed by the green Mini that could be jammed into awkward places by my boy racer farming "friends", just to wind me up, which it usually did. Next, came a 1300 Fiat Mirafiori, which I was told by those same Young Farmers would soon disintegrate with rust, and it did.
Then a milestone, in the form of company cars. Strangely, although those were much better cars: RS2000s, Cavalier SRIs, even a Rover Sterling and they didn’t cost me anything, they never had quite the same appeal as owning my own car. They were my office, I didn’t choose them and I remember someone once saying
"Something you get for nothing has little value".
Now though, I'm back to choosing my own cars and paying for them out of my own pocket. Oh well, that’s life!
So what’s this have to do with car finance? Well, whilst cars are fun and exciting
purchases, finance is dull and boring. Hardly surprising then that the finance option is often chosen in a hurry because it cheap with no regard for anything else, or done in the same way as its always been, usually through the dealer because that way I will get my car quickly.
To be honest, if I was not in the finance profession, I would probably do exactly the same thing.
But think about it. Spending a little time, searching for a little advice and exercising choice in what you select in your finance option can help you pay for the car that you really want, rather than the car you only think you can afford. So, after many years of driving bangers, here are some tips with the pros and cons on the options available and where you can source good finance deals. Happy driving.
The finance options:
• Hire purchase — Still the most popular method. You pay a deposit and fund
the balance over a fixed period. Usually the rate is fixed but variable rates are available. At the end of the agreement you pay a small fee along with your final payment and title in the car passes to you.
Pros — This method of funding is simple and easy to understand, early
settlement figures are reasonable and it’s an industry standard with APRs
making it easy to compare the costs of different packages.
Cons — You don’t have title until you pay the final payment and selling the car before that means a buyer may want to ensure that the car finance has been
settled. A little additional paperwork, usually easy to resolve.
• Leasing — Becoming more popular for VAT registered businesses as the rentals are calculated on the cost before VAT. This reduces the rental you pay
and, although VAT is added to each monthly rental, some businesses can
reclaim 50% of this if they can show that the vehicle is used for business
Pros — It’s flexible. You may get a VAT benefit and deposits are usually small.
Cons — Settlement figures can be high; you never actually own the car and if
you intend to keep it beyond the initial period you may have an additional small
annual or monthly rental to pay.
• Contract hire — This is for you if you are looking for a car to be supplied and
you want to pay a rental which takes into account maintenance and service costs,
you want the rental to reflect the fact that the car goes back to the supplier at the
end of the agreement with him benefiting from its value at this point. The rentals
are usually lower than other options, as are the deposits and you have the
comfort of knowing that your car is being maintained to the manufacturer’s specification.
Pros — It’s a no hassle route to driving a car. Someone supplies it, takes a view of what it will be worth at some point in the future, maintains it and if you are VAT
registered you may be able to claim back some of the VAT on the rentals.
Cons — If you go over the agreed mileage on the vehicle, it can be expensive as there are usually penalties AND you never build up equity in a car. In addition,
early settlements can be expensive.
• Car loans — You borrow a sum of money that is not secured on the car. It’s just a loan and you buy a car with it. Again, a very simple method.
Pros — The car is not secured against the loan and therefore often not
registered on HPI so selling it tends to be easier.
Cons — Because there is no security, sometimes (though not always) the APR
can be a little higher.
• Overdraft — Dead easy. You see a car, you write a cheque for it and you get charged interest on a daily basis until the overdraft is paid off.
Pros — It’s easy. Cons — It’s difficult to say exactly what it ends up costing as you never really know how long it is on your overdraft for. You may also regret having done it if
you find your borrowing limit has been used up by funding cars. Oh and don’t
forget those annual renewal fees and bank charges which are often charged on
the debit balances of your overdraft.
The best deal?
Question: “So how do I finance my car?”
Answer: “Balloon HP (But don’t tell anyone — it’s a secret!).”
This allows me to drive a top of the range car at a low monthly payment. Here’s
I choose my car from a dealer. I negotiate the best deal I can, then I put a deposit
down. I then pay 36 equal monthly payments, followed by a final payment
roughly equal to the anticipated trade value of the car. Result a great car and a
cheap monthly repayment.
Pros — Great car. Cheap repayment and, at the end of the agreement, I can
take ownership by paying the final payment (sometimes called the balloon).
Cons — Settlement figures are often higher than standard HP. And make sure
you set the value of the balloon realistically. Don’t set a value higher than the car
is likely to be worth in 3 years time.
So where can you go to get the best deal?
THE BROKER — I'd like to say my company but I'm not allowed to. So let’s just
say someone who knows what they are doing, a reputable broker who can be
trusted, who wants your business and most importantly who wants you to go
back to them. Someone who has a range of products and is independent of
promoting any one bank or finance house. Just please make sure you choose a
reputable broker who can offer you genuine choice and never make your deposit
cheque out to the broker. A reputable one will never ask you to do this.
YOUR BANK — Often an easy quick route and deals are usually reasonable, but not always as good as one expects.
THE INTERNET — Great deals (sometimes), but solving problems can be difficult and, again, don’t pay deposits to an anonymous site.
THE MOTOR DEALER — Some great deals where the finance is free — aye,
like it’ free! But watch out, sometimes if you negotiate a deal without finance you
might get a better discount on the car and then you can go get your finance
elsewhere. In addition, for used cars and cars not qualifying for a particular
finance promotion, the rate can be higher than you could obtain elsewhere
Get the insurance right
Finally, here’s a thought. If your car is written off, you will find that, despite paying ?400 or so each year for
car insurance, you will only get the trade value of the car as an insurance
So, if you want to purchase another new car of a similar model, you may have to
fork out thousands.
You can protect yourself against this by purchasing a ”return to invoice” policy —
don’t confuse this with a gap policy. Return to invoice puts you in a position
where you can take your insurance settlement, buy a new car of a similar model
and be guaranteed that the difference will be paid by another insurance company.
How much? — around ?100 per year and well worth it!
Whatever deal you end up selecting, go with what you are comfortable with.
There’s no point in taking a deal that on paper looks great but that in your mind
not happy with, make an informed choice and happy driving.