Buying a car can be stressful as it’s the second most expensive purchase you will make, apart from buying a house. Therefore, you want to be sure you make the right decision and are clear about what your options are. This post will look at the best way to buy a car and the key decision making areas to help you make the best choice:
The best way to save money on a car is not to have one
How to buy a car with cash?
How to buy a car with a loan?
What is financing Hire Purchase- the pros and cons?
Should I take GAP and warranty?
Personal Contract Purchase (PCP)
Personal Contract Hire (PCH)
What happens if your car is written off?
Car buying facts
Before we get into it, let's look at some facts about cars that will help you decide the best way to buy a car:
Cars, particularly news cars, depreciate in value the minute you drive it out of the dealership and continue to depreciate by approx 20% every year.
For the above reason, you never want to buy a brand new car, unless you are paying cash and can afford it.
Buying a car that is 3-5 years old and without high mileage is likely to give you equity in case you decide to sell it in the future.
You should never buy a car based on what others are driving- you don’t know how they are paying for it, so always buy a car that is ideal for your situation.
Decide on a budget and within this, consider three main features the car must have (e.g fuel, gearbox and year). This enables you to focus on what matters and help you stick to your goals.
Check the value of the car against the offer price to make sure you are getting a good deal. Do you homework before purchasing!
Check you can afford your monthly repayments (include insurance, Road Tax, parking etc) by doing a budget and seeing how this fits with your other financial commitments, as well as long term money goals.
If you are buying a used car outside of a dealership, make sure there is a warranty. Get it checked by an engineer to confirm the internal condition of the car.
Finally, test drive the car. Don’t judge a book by its cover. See how you feel when you are driving it.
Drive a car that doesn't keep you up at night!
How to save money on a car? By not having one is the best way to buy a car!
If you have previously owned a car, you will know that maintaining a car is expensive and the costs add up over the years. It’s not just the cost of buying the car. There are other associated costs such as insurance, excess, MOT, servicing, road tax, petrol, cleaning and parking each year. So think carefully about whether you need to have a car. Ask yourself, what is the purpose of having a car? Will I be driving it every day? How big does it have to be, will other people be using it?
You should also consider how it could impact on other financial commitments and goals such as savings and investing. Calculate the cost of taking public transport or getting a bike and compare it to running a car. Don’t feel under pressure to buy a car, if you don’t need one. If you have answered the above questions and still feel convinced that you need a car, let’s take a look at what options you have!
How to buy a car with cash?
The best way to buy a car is with cash and ideally with savings. It’s not a good idea to wipe out your savings account by buying a car.
So if you have money saved and want to pay cash for your car, stay away from buying a new model. Cars depreciate in value the minute you buy them. At the same time, you want to buy a car that is reliable with low mileage. If you decide to sell it off this will determine how much you can get on a used car. with low mileage and in good condition your used car will have some equity.
With this in mind, shop around for a car that is 3-5 years old. Depending on how much you have saved, remember you are not trying to buy your dream car. You are simply looking for an ‘ideal’ car that will meet your needs now, based on your financial situation. Once you have purchased your ideal car and have 3-6 months emergency fund for your bills,you can then focus on saving to buy your dream car. The best way to buy a car with cash is to decide on a budget and three must-haves for your car (fuel type, auto or manual and one more feature). This will avoid getting carried away when you’re shopping around.
If you are not able to pay in full with cash, try to put down as much cash deposit as possible towards the car. This will reduce the amount your owe and the level of interest. This will be added to the balance owed, should you decide to finance the rest.
How to buy a car using a loan?
Although, this is not the best way to buy a car, if you decide to take out a loan to pay for your car, try to get a 0% credit union or bank loan. If you have a good credit history, you have a higher chance of being approved for this. You may also want to consider how repaying this loan will impact your other financial goals, and loan term agreement works for you. Sometimes, you are better off getting a loan, rather than taking finance as credit unions, building societies and banks can offer a lower interest than the car finance companies. Whatever you do, never take a secured loan against your home for a car, as you may run the risk of losing your home.
Hire Purchase Agreement also known as ‘Financing’- Pros and cons
The way I explain Hire Purchase Agreement, is by comparing it to a mortgage. Hire Purchase Agreement is where you take out a loan against the car, with interest added and monthly payments made over a fixed period of time (1-5 years or more). The more deposit you pay and the better your credit score, the lower the interest and monthly repayments will be. Just like a mortgage, the car does not belong to you until you have paid it off in full.
As someone who wants to be the Boss of their Money, financing a car is not a smart option. Mainly because you are paying interest on a purchase that is going down in value. Remember a car is not an asset, but a liability. It will cost you to maintain and run even when it’s paid for. That being said, it’s better to be an owner than a hirer!
If you have good credit and large deposit to put down, you could get a 0% APR on a car or very low interest on a used car with affordable monthly repayments for a short term period like 12 months. This will allow you to own the car within a year.
If you do decide to get a Hire Purchase Agreement, remember to keep payments at an affordable rate and keep the time period as short as possible. You don’t know what your situation will be like 3-5 years from now. You also don’t want your car payments to derail your other financial goals like, savings, budgeting and investing. Always look at the bigger picture, when making any financial commitments.
Should I take total loss GAP insurance? And is extended warranty worth it?
When considering the best way to a car, especially if you are using the financing option, a dealers will often present extras such as GAP insurance and extended warranty. If you are financing an expensive car, have high interest and poor credit then GAP insurance can be a good thing. The GAP insurance covers the market value of the vehicle and the finance settlement figure, should you car be written off. Insurance companies will only pay you what the value of the car is at the time. If you purchased a car for £20k and within 1 years it depreciated to £15k, the insurance will pay your £15k and the GAP insurance will cover the rest of the cost. This will allow you to pay off the finance.
Extended car warranty is also worth having when buying a used car, as you can rest assured that any unexpected repairs which may arise would be paid for under the extended car warranty. You should however be clear about what the warranty covers, the duration and how much this will cost you in addition to your monthly repayments.
What happens if your car is written off?
If the repair costs to your vehicle are higher than the value of the car, your insurer will write off your vehicle. They may request several quotes and ask for the vehicle to be stripped. As a result this process can take several weeks - sometimes months.
Your insurer will inform you of the value of the vehicle. If you agree, they will send you documents to confirm and a pre-paid envelope for you to return your spare keys, V5 and service history book.
If you have finance on your car- your insurance will contact your finance company and request a final settlement figure. They will pay this off and deduct from your total agreed value. Any excess you have will be deducted, including paying the balance left on your insurance policy.
Finally, some good news. They will then write you a cheque or carry out a bank transfer of what’s left, after the above deductions.
Personal Contract Purchase agreement
Personal Contract Purchase agreement allows you to take out a loan on the difference between the car value now and the value of the car for the duration of the hire, based on how many miles you do over the agreed period of purchase. In writing, Personal Contract Purchase agreement doesn't look so bad, because you can hand back the car at any time, which will cost you nothing. Your monthly repayments are lower than Hire Purchase. Plus, you can usually put no or little deposit down. You have the option to make a ‘balloon payment’ to buy the car and own it at the end of term or even before.
Be mindful that if you decide to keep the car at the end of the agreed term, you will have to pay cash or finance the outstanding balance, so this means you are going back to square one. In addition, If you exceed the mileage, the value of the car will go down. You may have to pay additional fees, if you decide to give the car back. Even though it has it's perks, Personal Contract Purchase agreement may not be the best way to buy a car if you are planning long term!
Personal Contract Hire explained
If you need to have a car for a year or two, while you save for your dream car or have plans to travel and don’t necessarily need to own a car, then the Personal Contract Hire could be the best way to buy a car in the short term.
What I like about Personal Contract Hire is that servicing and maintenance costs are included in the monthly repayments. With this, monthly costs can be very low and affordable. You can just hand back the car and walk away at the end of the agreed period. If you are someone who likes to change cars and don’t want to be a car owner, this can be a better alternative to Hire Purchase agreement and Personal Contract Purchase. Again, if you exceed the agreed mileage it will cost you more and usually you have to put a deposit down.
To finish off
Now you have a better understanding of what your options are for buying a car. Buying a car really boils down to personal choice. Remember it is something that requires a lot of thought, shopping around and needs to be budgeted for. A car is one of many financial commitments, that you may already have. Having a car should not take priority over becoming debt-free. You should prioritise having savings, building your pension and owning your home. So whatever decision you make, let it not be one that will keep you up at night.