Business

Can you really afford that car?

There are various ways to pay for that new car

IT can be a tempting prospect to sign up for a new car when you see adverts which promise expensive brands for a manageable and low monthly payment.

Indeed industry regulator the Financial Conduct Authority (FCA) recently released figures which show that the number of car finance agreements for new and used cars has increased from 1.2 million in 2008 to 2.3 million in 2017.

But with so many more businesses and consumers turning to finance, it's important to understand the options available and the trade-offs they come with before putting a pen to the dotted line.

:: Personal loans - If you are not a cash buyer, you may wish to consider a personal loan. Often personal loans are the cheapest way to finance a car over the long term, especially if you plan to keep the same car for some time and can't agree to restrictive mileage limits.

Personal loans tend to have higher monthly repayments when compared to other financing options, however, a personal loan will mean you own your car outright and could sell it to repay your loan, if circumstances demanded.

When considering personal loans from different lenders, you should compare the annual percentage rate (APR). This includes interest and charges and will help you identify the cheapest option.

:: Hire purchase - This is very similar to a personal loan but you don't own the car until after you have made all the payments, which may include a one-off final purchase fee.

Under a hire purchase agreement, the amount you own is secured against the car which means that if you can't repay what you owe on the hire purchase deal the finance company can repossess the car.

As with a personal loan, you should compare the APR across hire purchase deals.

:: Personal contract plan (PCP) - This is increasing in popularity as it allows drivers to change cars regularly on low monthly payments.

With PCP you only pay off the depreciation of your car, not its overall value. At the end of your PCP deal you have the choice to return the car; to keep the car by making a final payment; or to trade the car in against a replacement vehicle.

PCP may suit you if you can accurately predict your annual mileage and if your budget will only allow lower monthly repayments.

:: Leasing - Leasing your next car may be a good option if you are happy to rent your vehicle, as leasing is often the lowest upfront and monthly option for new cars.

Leasing deals can be attractive in that you don't have the hassles of ownership of the vehicle and they suit high end cars that hold their value. Leasing may allow you to drive a car that you would never be able to afford to buy.

To protect consumers, the FCA recently announced plans to carry out a programme of ‘mystery shopping' among UK car dealers throughout 2018 to investigate the level of compliance in car finance sales.

The regulator is keen to ensure that the information provided to customers by dealerships is sufficiently clear and transparent to ensure that the risk involved with car finance is understood and purchasing decisions are properly informed.

:: Naomi Gaston is an associate at Carson McDowell Solicitors (www.carson-mcdowell.com)

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