Is a used car the best buy? Or should I consider other car finance options?

The author Jilly Cooper may be famously known for only buying used - perhaps most notoriously a Volvo Estate car (particularly in the news as Volvo - once known for its boxy estates - has decided to drop the estate car altogether) - as a way of getting from A to B without spending too much money. That advice from the author of many racy novels still holds good in many ways. The key thing about a used car - especially one that is more than three years old - is that it has already shed the best part of its depreciation. (Depreciation is the amount a car loses in value from its new price to its used value.)

Generally speaking, a car will continue to depreciate throughout its life but the steepness of the loss curve smoothes out after three years. Which makes a used car a good buy: you’re saving all that money lost to depreciation if you had bought it new. But it’s not the only way to access a new or used car. There are plenty of different car finance options available, depending on whether you want to drive new or used, and depending on whether you want to have exposure to variable used car values or just pay a monthly rental for ‘usership’ of a car. We have a look at the different car finance methods available to you - starting with used cars as Jilly Cooper advises - but the choice is yours; you don’t have to stick with a Volvo estate!

Buying a used car on HP

Hire purchase - usually just referred to as HP - is a way of financing a used car. You pay a deposit on the car and the remaining amount is financed through the HP loan which carries interest. This amount is paid off monthly in instalments over a period of time. The vehicle does not become yours until the final payment has been made, which is usually called the ‘option to purchase’. Some dealers may also offer you a slightly different version called a conditional sale agreement where the car becomes yours at the end of the repayment period (ie there’s no option to buy payment).

For

There are plenty of opportunities to access vehicles through HP thanks to the number of dealer finance offerings. Buying through a reputable used car programme will give you peace of mind that the car has been inspected and any issues will be covered under the warranty.
Payments are fixed for the life of the agreement.
As the finance company owns the vehicle until your final option to pay, you have additional protection should something go wrong with the car.
Initial deposit is lower than that required by PCP (see below).

Against

If you don’t keep up the repayments the vehicle can be repossessed by the finance provider as the car doesn’t become legally yours until the final payment has been made.
You are buying into technology that is already three years old.
Potential risk of buying a car without full known provenance if outside a used car programme
Need to watch for high interest rates.
If you terminate early you will be liable for 50% of the outstanding amount owing

Buying a used car with a loan

The advantage of using a finance loan to buy a car is that you have the money in your account and the vehicle is yours from day one. Banks and building societies are good sources of this type of finance. You also have more flexibility, because you can sell at any time.

For

Lots of used cars available from a variety of sources.
You own the car from day one.

Against

You will need to keep up finance repayments on your loan - missed instalments will impact your credit score.
Interest rates on car loans can be higher than other forms of car finance so do your homework.
Otherwise it’s pretty much the same as for buying a used car with HP.

Buying a used car on PCP

PCP is short for personal contract purchase. Using this finance for a used car means you pay a deposit for the vehicle followed by 36 or 48 monthly instalments. At the end of the term you can either pay the guaranteed future value, hand the vehicle back to the dealer subject to certain terms and conditions, or use it to start another agreement with the dealer.

For

PCPs can lower the overall monthly instalments compared with HP because you are not paying for the total value of the vehicle.
Interest rates are often lower than for HP agreements.
At the end of the term you can walk away from the agreement or decide to keep the car for the optional final payment.

Against

You don’t own the vehicle until payment of the optional final payment - which means you cannot sell it either during the agreement period if your circumstances change.
If you drive further than the agreed mileage there will be an excess mileage charge to pay.
Returning the vehicle will be subject to it being in agreed condition - known as fair wear and tear - so there may be additional refurbishment costs to pay.
You will need further finance to pay the final instalment if you decide to keep the car.
Will you want a car that is seven to eight years old by the time you get to own it?

But what if you decide a used car is not for you? What if you decide that purchasing a new car is better than some of the risks associated with buying used? Here are the various new car finance options that you can consider.

Buying new on a PCP

A personal contract purchase on a new car is the same as that on a used car PCP - except that the car is new, of course. You pay a deposit (usually 10% of the cost new), then agree a monthly payment over a period of time and mileage and at the end you have the choice to finance the rest of the car’s optional finance payment, hand the vehicle back or if the car has more equity in it than the optional finance payment, use this additional value as a deposit on another new car. And begin the cycle again. PCPs can be highly flexible. You can reduce your monthly payments by having a higher deposit; choose how long you want the agreement for - 24, 36 or 48 months are typical; and there is always the option to hand the vehicle back subject to agreed fair wear and tear terms. Car manufacturers and dealers like PCPs because it ties you into the brand on a continuous loop if the vehicle can be used as a deposit for another new car on PCP.

For

Readily available from car dealers with often competitive APR rates of interest.
PCPs can lower the overall monthly instalments compared with HP because you are not paying for the total value of the vehicle.
Flexibility in the agreement - you chose to hand the car back, buy it or use any additional equity in the car as a down payment for the next new car on a PCP at the end of the agreement.
De-risks you from potential falls in residual value if the car is worth less the optional final payment. The dealer gets to keep the car and you can walk away.

Against

You don’t own the vehicle until payment of the optional final payment.
If you want to buy it at the end of the agreement, then you need to find additional finance.
If you drive further than the agreed mileage there will be an excess mileage charge to pay.
There’s a risk there won't be additional equity in the car to cover the deposit on a new car if you wish to choose that route.

Buying a new vehicle on finance lease

Finance lease is popular with tradespeople who want to run a commercial vehicle. Sometimes you will hear finance lease referred to as ‘long-term leasing’ - a form of vehicle finance that particularly suits builders and plumbers - where vehicle condition at the end of the agreement is a potential issue. Finance lease can also be used for financing cars, but this is rarer. There are two types of finance lease. One is called a fully amortised lease, in which the finance is spread monthly over a fixed period which fully pays for the vehicle. The other is called a balloon lease which has lower monthly payments but a final payment at the end (the balloon).

For

Where vehicle condition at the end of the agreement could be an issue, or the mileage covered, finance lease is an ideal financing arrangement.
100% VAT can be reclaimed for commercial vehicles, and for cars where there is no private use.
There are no end of lease refurbishment charges.
There are no mileage restrictions or end of contract excess mileage charges.
At the end of the rental agreement you have the opportunity to enter into a secondary rental period with a low monthly lease called a ‘peppercorn’ rental.
If the vehicle is being sold, you can benefit from any potential profits from the resale value.

Against

If the value of the vehicle when sold doesn’t meet the balloon payment you are liable for the additional finance.
You never get to own the vehicle under finance lease.
You need to account for any VAT on the sale of the vehicle.
Early termination charges will apply.

Getting a new car on Personal Contract Hire (PCH)

Personal Contract Hire, which is often abbreviated to PCH, is a lease rental agreement that allows you to drive a new vehicle over a contracted period of time and mileage. Typically the lease period can be from two years to four years and from as little as 5000 miles a year, depending on how you intend to use the car. With a PCH agreement you are able to choose from an astonishing variety of new cars which can either be the car of your dreams or a car that takes your eye because the leasing rental is such a good deal. There are plenty of offers on the market from a variety of providers - including Intelligent Car Leasing. PCH offers a cost-effective finance method to drive a new vehicle but shields you from having to sell your vehicle later on. You pay an agreed number of rentals in advance, followed by a monthly rental. With leasing a new car you don't have to worry about used prices changing and reducing the equity in your vehicle - because you never own the car on a PCH agreement. There is the option to include vehicle maintenance as part of a maintenance rental agreement, allowing you to budget with certainty for all your personal motoring - except fuel (whether that’s petrol, diesel or electricity) and insurance, so there are no unexpected surprises that might affect your personal finances.

For

You can drive a new vehicle on a monthly rental that suits your budget.
A variety of flexible terms from 24 to 48 months means you can keep the car for a period that suits you.
Vehicle Excise Duty is included for the period of the contract.
You can regularly upgrade your vehicle and benefit from the latest advances in vehicle technology at the end of each rental agreement.
You never have to worry about part-exchanging or selling your vehicle again.

Against

You never own the car.
If your circumstances change, there are early termination fees to be paid.
If you have exceeded the vehicle’s agreed mileage, you will be charged an excess mileage rate.
When you return the car it is subject to what are called BVRLA fair wear and tear industry approved guidelines. If the vehicle has excessive damage or wear you may be liable to expensive vehicle rectification payments.

Using salary sacrifice to drive a new electric vehicle

Electric car salary sacrifice is a method of financing an electric car on a lease agreement at a far lower cost than if you were to lease one personally, thanks to a deduction on your gross salary and some advantageous tax breaks. What’s even better news is that there is no impact on your personal credit line and there’s no deposit for you to pay either - the lease resides with your employer. Salary sacrifice has become the fastest growing car finance method in the UK, although the downside is that not all companies are offering the employee benefit. At least not yet.

For

The most cost-effective way to drive an electric car if you are not a company car driver.
Everything is included in the electric car lease - insurance, maintenance, the lot. All you need to do is add the electricity and benefit from zero tailpipe emission driving and low running costs.
No impact on your personal credit lines.
Wide choice of electric vehicles.

Against

Salary sacrifice schemes may only be open to qualifying staff.
If you decide to leave your company during the lease period you may be liable for early termination penalties.
You need to have easy access to a vehicle chargepoint. This may include the cost of installing a chargepoint at home (some companies may wrap this cost up as part of your salary sacrifice agreement).
You don’t ever own the car.

Using a car subscription to drive a new car

Car subscriptions offer all inclusive motoring in a choice of vehicles. They are relatively new to the market but essentially it’s a way to drive a new car for a month, for three months, or longer. And then you hand it back or choose to drive another model. It’s ideal if car variety is your particular motoring desire, or if you want to ‘try before you buy’ - which is often the case with electric vehicles. Car subscriptions aren’t just for new cars - but used cars are also offered at a reduced monthly rental. For drivers unsure of a commitment to a longer lease or PCP, then subscription offers an opportunity to jump in a vehicle when you need one; and then out of it when you don’t. Car subscriptions are offered by a variety of subscription specialists, leasing companies, car dealerships and car brands.

For

All-inclusive driving - you don’t have to worry about anything because it’s included in the monthly rental.
Flexibility without the need for commitment.
Opportunity to try different vehicles before entering into a longer-term agreement.

Against

The flexibility and all-in nature of a car subscription is reflected in the monthly cost - which is generally higher than most other forms of car finance.
Some car subscriptions are less flexible than others - so check before you dive in.
Returning the car will be subject to certain fair wear and tear conditions.
There will be mileage penalties if you have driven more than the agreed mileage.
Smaller selection of cars available on car subscriptions.

Car finance sum up

As you can see, there are a variety of different ways to fund a car - whether used or brand new from the dealership. Generally they divide into two types: the first is to actually own the car at the end of the agreement; the second is if you want to just use the vehicle for a period of time before returning it - a form of long-term rental. Whichever car finance method you choose, we hope you enjoy driving your new car - whether it’s new or used.