Wheeling and dealing

Make sure you check out purchase plan and contract hire options before splashing out on a new motor

LAST week I answered a reader’s question about the best way to buy a new car.

I looked at options for a purchaser who wanted to buy a car outright before the new registrations come out next month. But many of us don’t buy cars that way these days, so I promised to come back and look at other options if you would prefer some sort of rental or gradual purchase model. So this week we’ll take a look at some of the longer-term purchase options as well as options if you want to rent – and in a couple of weeks, we’ll come back to this and do a comparison so that you can decide what’s best for you. Before we consider these options, there is one more thing to look at and that is whether you need to, or in fact should, buy a new car at all. There are all sorts of horror stories about the speed at which new cars lose their value and there is a school of thought that suggests you should let someone else pay for the depreciation and you should only buy a car that is already a few years old. Some experts say that the fastest depreciating cars could lose about two-thirds of their value within the first three years. So if you spend £15,000 on a new car today, you might find that in only 36 months you will be struggling to sell it on for £5000 – a loss of £10,000. You can go on a lot of holidays for £10,000.

The slowest depreciating cars, on the other hand, might lose only one-third of their value over the same time period, although that’s still £5000 off your original investment. HIRE PURCHASE OR PERSONAL CONTRACT PURCHASE With a hire purchase agreement, you purchase the car outright but don’t actually own it until the final payment is made.

There will usually be a deposit to be paid followed by three or four years of regular monthly payments.

Interest rates for this type of deal are likely to be higher than for a similar car bought with a personal loan that you arrange yourself.

There will be no mileage limit on a hire purchase agreement so for people looking to do big mileages, this could avoid any unexpected payments at the end of the agreement.

You don’t have the right to sell the car under a hire purchase agreement until you have settled the outstanding finance.

With a Personal Contract Purchase, you are really only paying

the depreciation during the term of the agreement and at the end of that term you have to make a lump sum payment, often called a “balloon payment”, if you want to purchase the car.

The amount of that payment will be agreed at the start of the contract and is known as the Guaranteed Future Value. If you don’t want to make that payment then you can simply hand the car back and start again.

You can settle early but be aware that you may need to make a payment to do so. For example, if the car is worth £12,000 when you want to sell it but you have £14,000 outstanding on your agreement, you will need to pay the £2000 to end the deal.

PERSONAL CONTRACT HIRE

Personal Contract Hire is a form of long-term rental and, as such, is probably the most hassle-free way of using a car.

Monthly payments are likely to be lower than the same car with a purchase deal. You lease a car for a fixed period of time and at the end hand it back and start again. There is no option to purchase.

Servicing is often included with this type of deal, cutting down costs, but you will need to insure the vehicle yourself. There may be a maximum mileage under the deal and there will be excess payments if you exceed this mileage.

In some cases, dealers don’t offer this option, instead they reckon that if you walk away from a Personal Contract Purchase option as explained earlier then it amounts to the same thing as a lease.

You need to be aware which option you are being offered as there may be differences in maintenance and insurance agreements between the two types of agreement. Some agreements may include service costs but not costs of items that have failed through wear and tear, like tyres.