Reduce the price of your new car

The introduction of new “57” car number plates in September will see many of us head to the nearest car dealership. Indeed around a fifth of new car purchases are made in this month alone.

Buying a new car is expensive enough. But don’t add to the cost by paying over the odds when you finance it. Choosing the wrong method could easily add £1,000 to the eventual cost of even the most basic model. As a general rule of thumb, any finance deal you’ll get at the forecourt will tend to be on the expensive side. While it’ll be easier to arrange, you pay a premium for the convenience factor.

Although the range of finance options for buying a car can seem bewildering at first, essentially there are three main methods, assuming you don’t have sufficient cash to buy outright. These are hire purchase, personal contract purchase and a personal loan. In all cases, the interest rate you pay will be fixed at the start of the deal, so you don’t need to worry about future rate rises.

Let’s look at each method in turn:

Hire purchase

With hire purchase you put down a deposit, typically a minimum of 10%. You then make a series of monthly payments for between one and five years. The car doesn’t belong to you until you have made all the monthly payments and, if you fall behind, the car could be repossessed.

In terms of cost, hire purchase is probably the middle of the three main options. Although 0% interest rate deals are available, they are often a marketing ploy to get rid of cars that are proving hard to shift or they require a large deposit of 30% or more.

Personal contract purchase

A personal contract purchase plan is essentially a long-term rental deal. Like hire purchase, you pay an initial deposit (again it’s usually 10%) and make a series of monthly payments. Personal contract purchase plans typically last for three years after which time you can hand back the car, or buy it for an amount agreed at the outset of the deal (known as the balloon payment), or trade your old car in for a new one.

Personal contract purchase is usually the most expensive of the three options over the long term. You’re paying for the first three years of the car’s life, which is when depreciation is the heaviest. The AA reckons the average car loses 60% of its value over this time. The flip side of this is that the monthly repayments tend to be lower than for hire purchase and personal loans, because during this time you’re only paying for the difference between the price of the car and the balloon payment. 

Another factor to be aware of is that you have to stick to the mileage limit you agreed when you took out the plan. You can also get a service and maintenance package as part of the deal, which can protect you from high service bills but on average will probably be more expensive than using an independent dealer.

 Personal loans

Using a personal loan will usually be the cheapest of the three options. You’ll only get the cheapest rates advertised if you have a good credit rating but you’ll own the car outright straight away so you can sell it when you like. You also won’t need to put down a deposit.

The cheapest personal loans are currently on offer from 6.3% APR. Recent research from uSwitch.com found that typical showroom finance deals came in at 10.8% APR, highlighting the fact that significant savings can be made.

Comparing finance deals

While you might think that evaluating which of the three options is cheapest is complicated, it can be relatively straightforward. Comparing the annual percentage rate (APR) can be somewhat misleading so simply add up all the payments you’re required to make under the three methods and compare the total amount repayable. To make a like for like comparison, you’ll need to assume that you would take the option to buy the car at the end of any personal contract purchase plan.

Another factor to consider is how often you intend to replace your car. If you plan to replace it every three years or less, then this may make a personal contract purchase plan more cost effective.

Saving money on insurance

Having got the financing sorted, let’s turn to insurance. As well as car insurance, it’s likely that someone will attempt to sell you two other types of cover as well.

First of all, there is payment protection insurance, which is supposed to cover your loan repayments if you fall ill or lose your job. This has received plenty of bad press in recent years for being overpriced and sold to people who aren’t eligible to make a claim. If it’s something you think you’ll need, it’s far cheaper to buy from a standalone provider.

Secondly there is gap insurance. If your car needs to be replaced following an accident or theft, your car insurance probably won’t replace new for old – you’ll receive money to buy an equivalent replacement. As cars depreciate quickly, the amount you receive is likely to be less than the money outstanding on any finance deal you’ve taken out.

Gap insurance covers this shortfall. However, if you’re happy to get an equivalent car rather than a new one, then there’s really no need for this cover. Again, if it’s something you want, it’s cheaper to buy cover from a standalone provider than from a car dealer.

Finally, make sure you shop around for car insurance each year. Saving a couple of hundred pounds a year on car insurance can result in a total saving of £1,000 over five years – more or less equivalent to the cost of picking the wrong finance deal for your car!