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If your car is old, always breaking down or simply becoming a bit of an embarrassment, you’re probably thinking about replacing it. But buying a new or used car can seem like a daunting prospect: do you ask the bank for a loan, go with one of the finance companies’ options or sign up to a lease deal? What will cost you the least money each month, saving your budget for all your other expenses, or are you more concerned about what the deal will cost you in total over the long term?new car finance

New car or “preloved” car?

While buying a spanking new motor might seem like the best option – lower running costs, fewer breakdowns and the cachet of driving the latest model – it’s worth remembering that the average new car will lose almost 50 per cent of its sale value over the first three years that you drive it. That’s just the average depreciation; many cars lose their value much faster than that with makes like Peugeot, Citroen and Fiat losing up to two thirds of their value over those three years.

That means that it may make sense to let somebody else take the depreciation hit and buy a car that is already three years old. But with a used car comes increased risk: it may be out of warranty meaning that you’ll have to pay for anything that goes wrong, the fuel efficiency may have declined since it was new and it may be more prone to break down than a new vehicle.

What to look for when financing a new car

If you’ve decided that your car must be new and that you’re going to have to finance it, then make sure that you always bear in the mind the annual percentage rate (APR) of interest that is charged on the deal. APRs can differ substantially between different manufacturers, dealerships and finance companies. That holds true when you are looking at the same model offered by different suppliers.

If the total cost of the deal is foremost in your mind, then don’t be swayed by talk of how low the monthly payments will be. These will usually come with a longer repayment term and a higher overall APR, inevitably piling hundreds of pounds on the total cost of the car over the lifetime of the finance. As a rule of thumb, the shorter the length of the loan repayments, then the less money you will have to pay in total even though the monthly repayments will be higher.

Bank loans

If you’ve got a good credit record, then you may be able to borrow the total cost of the new car with an unsecured loan from a bank. These are arranged separately from the purchase of the car so you can get the best interest rate and then drive a harder bargain at the dealership. With a personal loan, you’ll own the car from the outset meaning that even if you get into difficulty making repayments, the finance company will not be able to automatically repossess the vehicle.

Personal Contract Purchase (PCP)

The fastest growing area of car finance, PCP involves making a down payment on the cost of the new car and then entering a monthly repayment plan over a set period of time – usually two, three or four years. Once you reach the end of the finance plan, you can then make a final payment which brings your total payments up to the value of the car and keep it. Or you can opt out and hand it back to the finance company, using any residual value in the vehicle as a deposit on the new one.

PCP deals come with annual mileage limits so make sure that you’re realistic when deciding your limit at the start to avoid hefty penalty payments per mile later on.

Personal Contract Hire (PCH)

With PCH, you never actually own the vehicle. Instead, you enter into a long-term hire deal without the option of making a final payment at the end to take possession of it. Once you’ve made the final monthly payment, the finance company takes the vehicle back and you then have the option of taking a new deal on a new vehicle.

Monthly payments with PCH are generally lower than with loans or PCP meaning that the majority of people use this form of finance to drive a better car than they would otherwise be able to afford. Like PCP, PCH comes with annual mileage limits and penalties for exceeding them.cvar

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