Car Finance - How To Lessen The Financial Impact Of Buying A Car

Blog post   •   Feb 10, 2011 09:30 GMT

It’s a well known fact that owning a car isn’t something that’s cheap and affordable.  Speak to any driver and they’ll tell you a different story about how some part of car ownership is overly expensive, whether it’s the price of fuel, vehicle tax or car insurance.

And it seems that every single related cost does nothing but increase year on year.

This common belief amongst motorists was cemented in recent weeks when the RAC published their annual Cost of Motoring (CoM) index which stated that the amount of money needed to own a car on a year basis has increased by 6.3 percent to 5,869 pounds, the equivalent of 112.87 pounds per week or 48.91 pence per mile.

The issue that a lot of car owners have with this cost is that whilst breaking it down to a per mile figure makes it seem manageable, it unfortunately doesn’t work like that and you’re likely to need to pay out lump sums of money at various points across a year or the life of the car.

Whilst some of the costs that you have to pay out will be ad hoc, there are certain ways to ease the financial pressure somewhat, particularly in terms of the actual cost of the car, where there are three separate ways for you to fund your purchase that allows you to spread  the cost of the vehicle (plus interest) over an agreed period.

And when you realise that 80 percent of people use one of these three car finance options to fund their car purchase, you begin to understand just how popular they are.

Firstly, you have car leasing.  The most common product amongst leasing is Personal Contract Purchase (PCP). Leasing allows you to drive around in a car of your choice by simply paying a smaller monthly amount than you would if you bought the entire car  with finance. Because you’re leasing it, you don’t pay for the whole cost of the car but you have the option at the end of the contract if you want to, otherwise you can simply hand it back to the leasing company and get a new one.

Another option is hire purchase, which was once the most popular form of car finance. It is where you borrow the money to finance the purchase of the whole vehicle and you repay that full amount back (plus interest) over an agreed period. You do not own the car until you have made the final payment.

Finally, you have a personal loan or car loan.  The primary difference between this and hire purchase is that a personal loan is money leant to you to purchase and own a car outright as opposed to hire purchase where you don’t. If you default on hire purchase you’ll have your car taken off you, if you default on a personal loan, then the lender will try and recoup the money that they are owed directly from you.

No one will argue that car ownership is expensive, no matter how much money you might have in your bank account.  There are various ways to ease the pressures and by choosing either car leasing, a hire purchase agreement or a personal loan can spread the pain of the cost of ownership but it comes at a cost – interest.