More motorists are opting for finance deals when it comes to paying for a car, according to industry figures.
More than £100 million of credit was used to lease new and used cars in the second quarter of 2011 – a rise of 55 per cent compared to the same period last year, according to the Finance & Leasing Association (FLA), the lenders’ trade body.
Under a lease agreement, the motorist has use of the vehicle, and is responsible for keeping it maintained and insured but does not have the option to buy it.
But leasing is just one form of car finance. There are many different options so it pays to do your research to avoid the deal costing you more than is necessary.
Leasing
Lease agreements typically last for two or three years and it’s a good way to be able to drive a prestige vehicle that you couldn’t afford to buy outright.
Alicia Baugh, 31, a business consultant who lives in London, says leasing a car enabled her to drive a £30,000 vehicle without having to pay a large sum of money upfront.
“I took out a two-year lease on a Mercedes SLK because it was the cheapest way for me to drive a £30,000 car.
“I had to pay £350 a month and I had to put down a deposit of three times the monthly payment. So the upfront costs were quite affordable.”
There are cons however, as Alicia explains. “It was good for me at the time but looking back, with petrol costs, I spent more than £10,000 on a car and I have nothing to show for it.
Hire purchase (HP)
This is similar to leasing in that you pay a fixed monthly cost for use of the vehicle, typically for two to three years, but at the end of the term you have the option to buy.
You are the registered keeper of the car and are responsible for insuring and maintaining it, but the finance company providing the HP agreement remains the legal owner of the vehicle until you’ve made the final payment.
The advantage of HP agreements is the fixed motoring costs, but the main disadvantage is that if anything happens to the vehicle and you can no longer drive it, you still have to meet the monthly costs.
So you can end up paying for a car you can no longer drive.
Personal contract purchase (PCP)
PCP plans calculate the vehicle’s likely value at the end of the agreement, known as the minimum guaranteed future value (MGFV).
You borrow the difference between the car's current price and the MGFV figure, and repay the loan with an initial deposit followed by monthly payments.
At the end of the agreement you have three options. The first is to hand the keys back and owe nothing; the second is to pay the MGFV figure and own the car.
The third option is to use your car as a part-exchange for a new contract. As the MGFV figure is normally set low, the trade-in value is usually higher, so the difference can be used towards a deposit for your next contract.
The advantage of PCP is that the monthly payments are normally lower than other forms of finance.
Personal loans and credit cards
Whatever form of finance you got for, do your research first as finance offered at car dealerships can come at a premium.
Personal loans rates are very competitive, and depending on the price of the vehicle you’re after, you could even consider paying for it on a 0 per cent interest credit card.
Cash benefits
Of course, paying for a car with cash is generally the simplest option. However, dealers make more money from finance deals so don’t reveal that you’re paying in cash until you’re sure you’ve agreed the best price for the car you want.
Former car-lease fan Alicia paid for her current car with cash and says she feels better off as a result.
“I now own a BMW 1 series which I bought used and paid for with cash. It doesn’t feel like money down the drain because the car is mine no matter what happens,” she says.
Will Thomas, head of car insurance at Confused.com, agrees that the main advantage of paying for your car in cash is that you own it.
“Paying for your car outright means it’s an asset. If you hit on hard times, you can always sell it to raise cash.”
Please watch our 30-second guide for more information.
