HP or not HP that is the question?

You may have decided on the right car for you and your family, but should you buy it outright, look into a loan or even hire long term?

With electric cars pushing up the average costs we thought it would be great to run through the buying options;-

Car buying options – Save or invest?

What are my options?

Hire Purchase (HP)

Hire Purchase (HP) is similar to having a mortgage loan.  You need to put down a deposit and repay the balance, in instalments, over an agreed period.  These payments will normally include the interest. By the end of the period, so long as you keep up the repayments, the car is yours. Most contracts are between 36-48 months.

PROS

It is typically an easier type of finance to get approval for, dealers give competitive fixed interest rates, there are no mileage limits and you will own your car at the end of the term.

CONS

You car could be repossessed if you miss a payment.

Personal Contract Purchase (PCP)

Personal Contract Purchase (PCP) is a form of contract rather like hiring the car and the monthly repayments and initial deposit are generally lower than an HP contract. Your repayments cover the difference between the car’s value as new and the actual value at the end of the hire agreement.

For example, you buy a new car for £50,000 and you pay a deposit of £5,000 (10%).  You then owe £45,000. The finance company then predicts and advises that the value of the car at the end of the term, say 3 years, will be £25,000.  Therefore, you will only need to pay back the difference (£45,000-£25,000) = £20,000.

You do have the option to pay the £25,000 at the end of the term and keep the car or opt to have another new car and PCP deal.

PROS

The deposit and repayments are often lower than HP and you have a car that never depreciates.

CONS

Are that you don’t own a car in the contract period, the finance lender will stipulate a mileage allowance (the more mileage you do the less the car is worth) and potentially you will always have a monthly outlay when you start a new contract.

It is worth noting that if the future market value is worth more than initially advised by the finance company then you can use this differential as part of your deposit for your next PCP contract.

Personal Leasing (contract hire)

Personal Leasing (contract hire) is a long-term car rental.  You basically pay a monthly fee against a contract which will stipulate both the time frame and maximum mileage.  At the end of the agreement, you give back the car. So, in affect you can drive a new car within its warranty and then hand it back.

PROS

You do not have to worry about the car depreciating in value, you can opt to include a maintenance package, if you are VAT registered you can reclaim 50% of the VAT on finance payments and 100% on the VAT of the maintenance payments

CONS

You will need to take out comprehensive car insurance and there are penalties if you go over the mileage limit

Buying outright / with savings

Obviously, you can always pay for the car outright which gives you full flexibility if you want to sell the car at any time.  However, it is worth comparing interest rates on your savings ‘v’ loan agreements allowing for the big factor that a new car depreciates in value as soon as it leaves the forecourt.  Plus you may wish to keep savings for a rainy day or emergency.

Personal Loan / Credit Card

You can seek an independent personal loan with monthly repayments or potentially use a credit card with 0% interest. However, remember that a new car can depreciates up to 20% value as soon as it hits the road and therefore these two types of borrowing can, if your circumstances change, become risky. Therefore, it is important to really do your homework

“If you need a machine and don’t buy it, then you will ultimately find that you have paid for it and don’t have it” – Henry Ford

Everyone’s personal circumstance and budget are different and it is important to look at your long-term options when deciding on both the car and how you will finance this expensive purchase.

Buying with cash or personal savings