So you want to buy a car! Car finance has to be considered along with all the decisions of which make and model, petrol or diesel, new or used. Do you pay cash, get a bank loan or use Hire Purchase or Conditional Sale.
In order to make this decision you may want to consider the costs and implications of each option. Let’s look at each one individually.
Using Cash for Car Finance
Even though it is your money it will still cost you to use that money. If you have that money sat in a savings account you will be earning interest, the type of account will determine the level of interest you receive, but for this example we will use 5%. If the car you are purchasing cost £10,000, then the cost of using your savings is £1576.25 This is worked out as follows:-
Year 1 5% interest on £10,000 = 500
Year 2 5% interest on £10,500 = 525
Year 3 5% interest on £11,025 = 551.25
Total lost interest = £1576.25
You would then have to replace those savings.
Let’s look at the other options for funding your vehicle.
Using a Bank Loan to Purchase a Car
You can borrow the money from your bank at the agreed interest rate and make your monthly payments. The car is yours from day one.
However, the funding facility you have at the bank is very valuable, they will allow you to use this line of credit for almost any purpose, but they will only lend you a certain level in order to limit their exposure to bad debt, should anything go wrong with your ability to pay. What do you do if you need to use that credit line for something else such as home improvements or a holiday and you have tied this credit line up for three or four years for car finance? You could be stuck. One of your options could be to use a specialist credit facility designed specifically for car finance.
Hire Purchase or Conditional Sale
To all intents and purposes these two methods are the same. A finance company lends you the money, (The finance company will pay this direct to the motor dealer) you then hire the vehicle from the car finance company for the agreed monthly payments. It does not become your vehicle until all the payments have been made. The advantage of this type of credit is that it leaves your credit facility at the bank in tact for other uses. You are also afforded additional protection under the consumer credit act as the car finance company is jointly responsible along with the garage for the merchantable quality of the vehicle you have purchased. Because the Finance company have an interest in the vehicle, they will carry out an HPI check to ensure it is not on finance, been an insurance write off or stolen, saving you additional costs and giving you peace of mind. This is not available with a bank loan.
For the financially astute; If you had savings you could use those savings to reduce the overall cost of your car purchase by offsetting the interest cost of borrowing. It would work like this:-
If you were to borrow the money at 6%, (that’s an approx APR of 12%) the interest you would pay back would be £1800. If you kept your savings the interest you earned, we have already established, would be £1576.25. Therefore the true cost of borrowing the money would be £1800 less £1576.25 which is £223.75. Your repayments on the loan would be £327.78, which is approximately what you would have to put back into your savings account each month to replenish your savings, had you paid cash. So in summary here are the costs:-
Cost of using savings £1578.25
Cost of Borrowing £1800.00
Using one to offset the other £ 223.75
We trust that the above comparisons for your car finance options were helpful and not confusing. Either way, fill in a no obligation application form, or contact us should you require further clarification or additional information on your car finance.
Please note that articles on this website do not constitute regulated financial advice, which recommends a course of action based upon the specifics of your personal circumstances. The articles are intended to provide general personal financial information. We urge you to consult an Independent Financial Adviser (IFA) before making any important decisions about your finances. |
