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Car Leasing & Car Finance

Payment Options
Use our guide to finance schemes to make sure you get the deal to suit your needs
These days almost every retailer that will sell you a car will also offer you finance to buy it with.

There is a wide range of options and products to choose from, some of which can be difficult to understand. To help you narrow your options, we have outlined all the popular ways to finance a car purchase.

Cash
Being able to pay upfront with cold, hard cash might be the simplest way to buy, but you could be missing a trick. By taking advantage of a 0 per cent finance deal, you could pay your deposit, then collect interest on the balance until the end of the free finance period.

But be warned: if you fail to make the final payment by the due date, you may face penalty charges, which can be considerable.

Personal Finance
A bank or building society loan is a good option if you want to own your car outright, or if you don't have enough cash for the deposit you would need for dealer finance. There is fierce competition among banks, building societies and other lenders for your business, so shop around for the best rates.

Unsecured personal loan With a personal loan, the period is fixed at the outset and your monthly payments cover the loan plus interest. Interest rates on unsecured personal loans vary according to your circumstances and the amount you borrow. You will need an unblemished credit history to get the best rates.

Car purchase loan Car purchase loans are similar to unsecured personal loans, but they take into account the fact that your car will have some value at the end of the loan period. This means that you benefit from lower instalments during the loan period, because you defer paying off a large chunk of the loan.

At the end of the loan term, you can either pay the balance and keep the car; sell the car and pay the balance with the proceeds; or take out a second loan to pay the balance. But whichever option you choose, you pay interest on the whole amount borrowed.

Credit card If your credit limit is high enough, a new credit card could provide you with the borrowing power you need for your car purchase. Many card issuers have low introductory interest offers (usually for the first six months) that can work out cheaper than a personal loan – see 'Cut your card costs', Which?, June 2002, p46, to get an idea of the best standard and introductory rates.

Bear in mind that some retailers charge a fee of 1 or 2 per cent if you choose to pay by credit card – on a large purchase, this can increase the cost significantly.

Dealer Finance
By providing finance for your car, dealers can increase the profits that they make from selling you a car. Most dealers offer hire purchase (HP) and personal contract plans. Personal leasing (contract hire) plans for private buyers are also available from some dealers.

Dealer car finance interest rates are higher than personal finance rates. As we went to press, typical APRs were 12 to 14 per cent, compared with 8 to 10 per cent for the best personal loans.
Hire purchase (HP) With an HP agreement, you pay an initial deposit (usually at least 10 per cent), then pay the remainder, with interest, in monthly instalments. The finance company owns the car until you make the final payment, so it's not yours to sell until the HP has been settled. The interest you are charged can vary depending on how much deposit you put down and the duration of the contract, so work out whether the amount you pay each month or the total cost of the loan is more important to you.

Personal contract plan (PCP) PCPs work a bit like car purchase loans, but with a hire purchase element. Like HP, you pay a deposit and you don't own the car until the final payment is made. However, you can defer a large part of the loan until the end of the contract, which reduces your monthly payments. However, as with a loan, you pay interest on the whole amount.

When the plan begins, you are offered a 'minimum guaranteed future value' (MGFV) for your car, which is subject to agreed mileage limits and the car being in a good condition at the end of the contract period. The MGFV is at least equal to the deferred lump sum.

You have three options at the end of the repayment period.

Pay the deferred amount and keep the car (but PCPs are an expensive way to buy a car, because the interest rates are usually higher than those of bank loans).
Sell the car (to someone other than the original dealer) and use the proceeds to pay the balance and end the deal.
Hand the car back to the dealer as the final payment. But if you have exceeded the pre-set mileage limit, or if the car isn't in good condition, you will have to pay an extra charge.
The MGFV set by the finance company is a crucial factor in a PCP. If it is too low, your monthly payments will not be much less than with HP. If it is too high, you might not be able to sell the car for more than the MGFV, so unless you just hand it back to the dealer, you will have to find extra money to settle the finance (or to be used as the deposit for your next car).

Used car prices have plummeted in recent years, and there have also been record levels of new car registrations. In a couple of years time, there could be a glut of used cars. For this reason, any finance that relies on predicting future values will work best for those brands that depreciate least, like Audi, Mercedes-Benz, BMW and Volkswagen.

Personal Leasing
Dealers are anticipating that with the recent changes in company car tax rules, personal leasing plans will become increasingly popular. With these plans you do not own the car. Instead, you make fixed monthly payments to use it for a specified period. Some schemes cover running costs like servicing, breakdown cover and road tax, too. As with PCPs, you might incur penalty charges if you exceed the agreed mileage, or if the car is not in an acceptable condition when you hand it back.

Lease Purchase

This scheme, which has become less popular in recent years, is aimed at business users who can claim back VAT on payments, rather than private buyers. You have to pay a deposit and a deferred lump sum at the end of the contract. However, unlike a PCP, there is no fixed valuation guarantee for the car, so you bear the risk that the value of the car at the end of the loan may not cover what you owe.