To fund or not to fund
Traditionally we saved our pennies to purchase the mode of transport that would give us and our families freedom of movement. Some used the banking institutions to borrow a sum and then repay back as a “Hire Purchase” arrangement. This method was regulated in the 1938 Hire Purchase Act and it gave consumers quicker access to goods including motor vehicles.
The way we pay for our transportation has changed over the years and new generations of consumers will more than likely choose a “tariff payment” to run a vehicle. Personal Contract Purchase (PCP) is popular with the buying public for both new and used vehicle purchases, this generally gives a lower monthly as some of the loan is offset to the end when you can pay to own or, importantly, use the vehicle to settle. The traditional Hire Purchase (HP) gives you ownership at the end of the agreement without a large final payment.
All funding methods contain an interest element so in general taking a previously enjoyed vehicle on a finance scheme will cost you a little more as a total payable. However, consider a PCP and you could benefit from a managed depreciation cycle. Peace of mind that the final payment is also a minimum guarantee of its value. For example, we can only guess at what our car will be worth in 3 or 4 years. So, if the market in the future dictates your cars value to be less than the final payment, then it is the finance company that can take the loss, if we choose. This is an important feature in our rapidly changing market with legislation, electrification, social behaviours all contributing towards less predictable used car values.
Having worked in motor finance for various brands over many years I have seen the appetite for funding a used car purchase grow, albeit not necessarily through the supplying dealer. We now have more choice to facilitate our funding habit. Online stores, sale platforms and desperateseller.co.uk will provide monthly payment searches for your next purchase. The high street banks have been getting a share of the PCP market for a number of years with Halifax, Lloyds and Bank of Scotland all offering a guarantee future value funding scheme. Be careful in choosing the provider as a regulated agreement lends the money against the car. Choosing a CCA agreement (1974 Credit Consumer Act) gives you consumer rights. For example, early handback rights. Also, you could reject your car to the finance company due to merchantable quality issues and ongoing major problems. On the flip side the car is not technically yours until you pay the finance company in full. With a personal loan the agreement it doesn’t link to the vehicle only to your personal credit line, giving you freedom to sell and keep the proceeds.
Within the funding options umbrella is leasing, also known as contract hire. This is simply a rental agreement over a fixed term and cost. Just like hiring a car for a day, you hire it for your choice of years. As you never own it then VAT is charged on the rentals so this method has been popular with business’s as the asset (vehicle) is purely a cost that can be offset. The private market for rental is buoyant with many major finance companies, subsidiaries and manufactures offering customers Personal Contract Hire. These PCH rental agreements are more suited for non-ownership consumers wanting to drive a new vehicle.
If you have never funded your vehicle before then it will be a little harder to take the plunge on a monthly to run your car, especially if you have been taught only to buy what you can afford. Although affordability has become a monthly amount not a screen price so it requires a change in mindset to be comfortable with the finance company owning your own transport. The guaranteed final value and interest rate will affect your decision on what or how or buy your next car. In deciding be honest with how long you will keep your car. I regularly heard customers saying “I will keep this one forever” and then have seen them 2 years later for an upgrade. Even if you buy it outright you will still be paying a monthly payment in depreciation. The general rule that works for most is if it depreciates finance it and if it appreciates then buy it. In summary, to fund or not to fund, that, is the question.