You need a new car but boy is the cost going to make a big hole in your wallet. Where do you start and what payment options do you have to make the Porsche or Twingo of your dreams yours?
What type of car do you want?
For some, their car is an extension of their personality; an expression of how they see themselves. For others, it’s merely a means of transport that gets them from A to B; a car that ticks the ‘must have’ boxes within a set budget.
Even your career path can influence what type of car you buy – research* suggests that 60% of dentists drive a sports car – and how you drive it! According to car insurance dataƗ, surgeons and GPs are the worst drivers for causing an “at fault” accident.
Whatever your chosen make and model of car, the cost of buying a car can take a big slice out of your disposable income…especially now with mortgage rates so low.
When should you change your car?
While some of us are of the ‘keep ‘em ‘til they fall apart’ school of motor ownership, others love that new car feel too much to go without it for more than a couple of years. Personal views aside, how often you change your car can affect the overall cost of owning it.
If, for example, you use your car for work, you may benefit from available writing down allowances ie you can expense certain levels of the car’s depreciation on your tax return, leaving less profit to pay tax on.
As a car gets older, it also starts to cost more; it functions less efficiently and parts need replacing. Changing your car every few years can save you from having to pay those big bills that sometimes end up being more than the car is actually worth!
Where do you start looking for your new car?
In the ‘old days’ you just went to a dealer or scanned the small ads section in AutoTrader or your local newspaper, red pen in hand hoping you got to that ‘perfect’ car before someone else did.
These two methods still endure but both have evolved and been added to by alternative methods. What are the pros and cons of each?
Buying a brand new car from a main dealer
- Total autonomy over all aspects of the car, from colour to spec.
- A main dealer warranty provides peace of mind.
- Equipped with the latest technology, be that parking itself or automated driving.
- Better safety features (generally speaking).
- No previous owner!
- Immediate depreciation of the car’s value as soon as you drive your brand new car off the dealer’s forecourt.
Buying a second hand car
- You get a lot more car for your money: someone else has incurred the immediate financial loss and run the engine in nicely for you.
- You may still get some warranty reassurances if you’re buying through a dealer or, if you’re purchasing the car privately, you can buy a used car warranty from a third party provider.
- You need to do an HPI check to make sure that the car isn’t recorded as stolen or written off, that it has no debt registered against it, etc.
- The previous owner could have been a careful lady owner or a carefree boy racer…you never really know how well it has been driven in the past or how often it has been serviced and by whom.
- You may be buying someone else’s problem. Consider getting an independent pre-purchase inspection from a third party such as the AA or RAC.
Buying a car from an auction
- Considerable savings can be made, often amounting to thousands of pounds.
- The auction process, particularly the online capabilities, give a lot of detail on the vehicle and a rating system is often used to give an indication of the costs of any work you may wish to do.
- With most modern cars you could reasonably expect relatively trouble free motoring for a while, particularly those with mileage under 50,000. Any work that needs to be carried out is generally unlikely to cost more than the savings you made by buying the car at auction.
- Typically not worth considering for cars under £10,000.
- You often don’t get to see the car before you buy it; you only get to see pictures of it, particularly if you use the online auction facilities.
- Very little, if any, comeback if something goes wrong with the car; you cannot take it back in the same way you can to a dealer.
- Payment is immediate so you have to have the funding in place before the auction starts.
How do you pay for your new car?
If you buy the car privately or through an auction house, you’re likely to have little option than to settle the full amount immediately.
If, however, you buy your new or second hand car through a dealer, you’re likely to be offered an array of finance options. Dealers can in fact make as much, if not more, via financing of the car than they can from selling the car itself.
Hire purchase agreement
With a hire purchase agreement, you pay a deposit of typically around 10% and then a series of fixed monthly payments over an agreed period, usually 3 – 5 years. The car isn’t yours until after the final payment has been made.
This is more akin to a long-term rental. You pay fixed monthly payments to use the car until the contract expires.
The payments tend to be lower than with other types of car finance, but you will have a mileage restriction. The higher the mileage, the higher the payment. If you breach the mileage restriction, the costs are punitive.
There are two main types of car leasing:
- Personal contract hire (PCH): You never own the car.
- Personal contract purchase (PCP): You have the option to buy the car at the end of the contract by making a ‘balloon payment’.
The financial side effects of buying a car with a finance scheme
Paying for a car through a finance scheme can unwittingly impact other areas of your finances, including:
Getting a mortgage
When you apply for a mortgage or want to remortgage, most mortgage lenders look at what you can afford. Having car payments as an outgoing cost may influence the amount they will be prepared to lend you.
We are seeing some companies, corporate bodies and the NHS offer finance options via the workplace. In the case of the NHS, they offer a salary sacrifice scheme. Whilst this does offer tax savings, it lowers your superannuated income which can impact your pension.
Your allowable expenses
If you have your own company or you use your car when you’re doing private work, you need to discuss with your accountant how they disclose this expense. Whether you’re driving a fuel efficient Citroen C3 or a Bugatti, the mileage allowances are the same.
Buy your next car wisely
Whether you view your next car as a symbolic or merely functional asset, there are clearly many different ways you can find and pay for it. Before you do, and certainly before you pay any sort of deposit for it, make sure you:
- Check with your financial adviser that you really can afford that car of your dreams and,
- Check with your accountant that how you plan on paying for it is the most efficient way for you.
Will you be looking for and paying for your next car any differently than you have done before? Let us know by adding a comment below.