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How to fully understand your car finance deal

How to fully understand your car finance deal

2 April 2019 Concept Car

Are you unsure you’ve fully understood the car finance deal you’ve signed? Do you know what, exactly, happens at the end of a PCP deal? Can you say with certainty how much your contract will cost you? And can you return a used car if it doesn’t live up to your expectations? Let us help you in this feature!

For most people, buying a car is the second largest investment of their life, right after buying a house. For those among us who can’t afford our ‘own castle’, it is the biggest investment we’ll ever make.

The stakes are high, therefore. And yet, so many of us don’t actually understand the basics of the car finance deal we’re signing. Various studies over the years (see here) have indicated that the terms and conditions remained unclear to more than half of all drivers!

In this article, we’ll focus on helping you understand the fundamentals of any car finance deal. Afterwards, you should be able to take the necessary decisions with a lot more confidence.

Part 1: Understanding the basics of finance

A car finance deal may look like it’s about a car. In reality, it’s simply a financial transaction. Although it may feel different, financing your vehicle at a dealer is exactly the same as going to the bank.

What we’re saying, is this: It’s all about money. Each car deal includes a variety of details and a lot of fine print. But it’s sole purpose is to answer this question: How much is it going to cost me?

The answer depends on a few basic considerations. Here are the points you need to look at:

Used or new?

This matters because the terms of the car finance deal depend fundamentally on whether you’re buying used or new. With a new car, you can usually get far better interest rates. With a used car, your monthly instalments will mostly be lower.

So, if your deal for a used car has slightly less attractive conditions than a comparable new car deal, then this is perfectly fine. Just make sure the difference is not too big.

Leasing versus buying

In its strictest form, leasing is an entirely different financing model. With leasing, you’re never the legal owner of the vehicle. After the term has expired, you return the car to the dealer and can either apply for a new one or end the contract.

Because it is so fundamentally different from buying, leasing focuses on different aspects. The interest rate is called money factor here and you need to perform some calculations to work it out.

A leasing contract will contain additional specifications about …

  • … a possible mileage limit. If you’re driving more than this, you will pay a financial penalty.
  • … the kind of wear and tear that’s still within limits.
  • … the kind of changes you are allowed to make to the vehicle (not many, usually).

Leasing is a world onto itself. You can read our blog entry about it to find out more.

PCPs, HPs

If you’re interested in a new car, you’ll most likely have heard about PCPs and HPs. These two models are currently the most popular type of car financing in the UK. Still, many fail to comprehend their basic assumptions.

What you need to understand is this: With a PCP, you’re signing a contract that’s neither buying nor leasing, but something in between. With an HP, you’re signing a contract that’s essentially a regular buying deal, but with a few twists.

Here are the basics of HPs:

  • With a HP (Hire Purchase), you’re paying off your loan in monthly instalments. But you’re only fully the owner of the car after you’ve made the very last payment.
  • HPs are more expensive than most other types of financing. The rates are based on the full price of the car.
  • If you fail to make one or more payments, there will be consequences. Make sure you know what they are. Since you’re not the legal owner of the vehicle, it is far easier for the lender to snatch it away from you again.

This is what you should know about PCPs:

  • A PCPs (Personal Contract Purchase) is foremost a variation on the leasing concept. It is not primarily intended as an alternative model for buying a car.
  • PCPs are actually more expensive than most other types of financing. But the monthly rates are fairly low. This is because they are based on the difference between the new value of the car and its residual value at the end of the term. (essentially, you’re paying off the depreciation) This is far less than what you would have to pay with a Hire Purchase plan.
  • With a PCP, you’re paying off your loan in monthly instalments. But you’re never the full owner of the car. Only at the end of the term can you pay off the remaining money, called a balloon payment. Or you can switch cars and start a new PCP contract.

Zero Percent Deals

Zero Percent Deals sound too good to be true: Are dealers really giving away money?

Strictly speaking, zero percent deals are not a scam. But they are typically reserved for the very best buyers. If a dealer advertises such a deal, he only needs to offer it to a limited amount of customers. Others will simply get the typical rates based on their credit score.

Zero percent deals also have quite a few caveats. One being that the zero percent clause only applies for a limited amount of time – one year, for example.

And of course, dealers will always find other ways to make money off you. There are numerous fees involved in zero percent contracts, just as with any other car finance deal.

If you can get a zero percent deal with all-round great conditions, then great. If not, we wouldn’t worry about it too much, to be honest.

How much is it costing me?

As mentioned, car finance is about one thing only: Money. So even if you don’t want to spend too much time on the details, you need to know two things at least:

  1. How much am I going to pay for this car each month?
  2. How much is this car finance deal going to cost me overall?

Interestingly, the two are not identical. How much you are spending each month depends on the way the rates are calculated. As we mentioned, Hire Purchase agreements and regular car buying loans are based on the full value of the car. Their monthly payments are going to be higher than a Personal Contract Purchase, which uses depreciation as its yardstick.

You can get the lowest monthly rates with a PCP, then mostly HP and leasing.

When it comes to what the financing is actually costing you, the situation is pretty much reversed. Leasing tends to be most expensive, because you can not sell of the car at any point, nor can you reap the benefits of driving a car that’s paid off. A regular car loan is still cheapest overall.

There are two important numbers here.

One measure of cost in any car finance deal is the APR. It tells you how much of your payments, on a yearly basis, are going towards the lender. The higher this number, the higher the cost of paying for the car.

The other important factor to take into consideration is the length of the contract. Paying a 200% APR for a paydeal loan for a mere three months may be okay. But paying that kind of astronomical APR over a three year timeframe is going to ruin you.

You can and probably should use a car finance calculator https://www.conceptcarcredit.co.uk/our-car-finance-calculator/ to work out the exact numbers for your contract.

Car Finance Basics Recap:

To cap it up, make sure you know the following:

  • Be aware of the difference between leasing and buying. With leasing, you’re never the official owner of the car. There are more strict rules of use and you may get fined for driving too much or too recklessly.
  • HPs and PCPs combine elements of leasing and buying into new car finance deals. An HP is closer to buying, a PCP is closer to leasing.
    At the end of an HP deal, you’re the official owner of the car. At the end of a PCP deal, you’re not. You can, however, buy the car in a PCP as well, by paying a balloon payment.
  • Regular car loans are the cheapest form of finance (they have the lowest APR), but PCPs can give you the lowest monthly rates.
    • To assess the true costs of any car finance deal, you need to know three things:
      The APR, which is the interest paid on the loan.
      The length of the loan, i.e. how long you are going to spend paying off your obligations.
      The monthly rate, which is how much you’re paying off your loan with each instalment.

Part 2: Understanding your rights

We all make mistakes. And, as John Lennon once famously said, life is what happens while you sit around making plans.

Of course, some mistakes are more costly than others. And some blows of fate hurt more than others.

So, what happens if you’re dissatisfied with the car you bought? Everything you need to know about this should be specified in your contract. We’ve compiled the most important aspects of your car finance deal below.

Dealer versus private party


The most important difference you need to be aware of is buying a car with a dealer versus buying it from a private party.

If you’re buying a car on the private market, you hardly have any rights for a recourse at all. The seller is not liable for any repairs that may occur, not even if the car becomes worthless the day after you bought it.

The only thing that you can use against a seller is wilfully wrong information. So, if the seller claims the car has been paid off and it turns out to still have debt on it, this can be a reason to nullify the agreement. But you do need to be able to prove this. Which won’t always be easy.

One of the main benefits of buying with a dealer is that you have far more extensive rights. Let’s take a look at them.

Returning a car

Returning a car was a somewhat murky legal grey area for many years. A lot of this was within the digression of the dealer. Clearly, this wasn’t always to the benefit of consumers. New legislation has changed that and created a far more transparent situation.

If you find a fault, you can now return a car, either used or new, within 30 days after buying it. The dealer can request to repair it instead, but if the repair is not to your satisfaction, you can simply ask for your money back.

Of course, 30 days is not a very long time. Beyond that, you’re usually stuck with your car, even if it turns out to be faulty. But this doesn’t mean you don’t have rights.

Warranty

Between 30 days of buying the car and up until six months after the date of purchase, you can demand faults to be repaired under the car’s warranty. This means that the burden of proof is with the dealer: They need to prove that the fault was caused by you, not them or the car.

This six months warranty is one of the most convincing arguments in favour of buying with a dealer. Even without looking at exact statistics, it is easy to see that this time period is one of great uncertainty: Will the car really turn out to be as great as you hoped – or are you going to be saddled with problems?

The six month warranty forces dealers to step up their game and make sure the car is really up to your standards. Unless they want their garage haunted by hordes of dissatisfied customers.

After the six months have elapsed, you are still entitled to free repairs, if the fault was not caused by you and if it was already present the moment you bought it. You will need to prove this, however, and this may in turn require an (expensive) expert statement.

Failed payments

An important part of any car finance contract deals with failed payments. After all, we can all occasionally run into trouble. The question is what it will cost us.

Failed payments can be a source of very serious problems for you. In some severe cases, just one or two can result in the voiding of the deal and the loss of your car. Make sure you read these clauses carefully. You need to know exactly how much leeway you have. If the contract is extremely severe and you can’t guarantee you’ll be able to stick to your payment schedule, it may be better to step away from the deal.

In practise, most dealers will exercise more patience. Simply put, they have more to gain from working with, rather than against you.

Your car finance deal should specify exactly what will happen if you fall into arrears. One provision could be that your APR rises as a result. This, in turn, increases the financial burden for the remaining loan period. You should obviously avoid this at all cost.

Ending your contract early

Perhaps contrary to expectations, it is actually possible to end your car finance contract prematurely, provided you’ve already paid back more than 50% of your loan.

This so-called voluntary termination agreement is a necessary part of all PCP and HP deals. It is a great solution if you no longer can or wish to use the car you’re currently driving.

However, this is far less attractive than it may seem at first. The Voluntary Termination Clause does not simply let you off the hook. It merely means you can pay back your debt in a single sweeping payment rather than many monthly instalments. You will still need to pay the entire remaining loan sum plus the balloon payment! This applies to both HP and PCP deals.

Things are different with leases, however. Usually, you can not terminate these early. If you do, you may have to repay the entire remaining instalments in one go.

Whether or not a termination clause exists in other types of car finance depends on the dealer. Make sure to seatch for this information in the fine print.

Car buying rights recap:

  • If you’re buying from a private party, you have almost no rights of recourse.
  • When buying from a dealer, you can return the car within the first 30 days after buying it.
  • You have a full warranty within the first six months after buying it. Within this time frame, the dealer needs to prove you are to blame for the fault – otherwise, the cost will be on him.
  • You have a limited warranty beyond the first six months after buying it. After the six months have elapsed, you will need to prove the fault was there from the moment you bought it. This may require expert statements.
  • Failed payments can have serious consequences, ranging from an increase in the APR to termination of contract and return of the car to the dealer.
  • Ending your contract early is possible with a PCP or HP if you’ve paid back more than 50% of the amount due. You will, however, still need to pay back the remaining loan as well as the final balloon payment.

Armed with this knowledge, you should now be able to fully understand your car finance deal. If you’re buying a car with Concept Car Credit, we’ll gladly explain every clause of your contract with you. We believe it simply doesn’t make sense to sign something you can’t fully sign off on.

You can reach us by phone or at our Manchester showroom. We look forward to your visit!

2 April 2019 Concept Car