Whether it feels as though it’s the ‘end of the road’ for your current car, an exciting new model has caught your eye or a new company motor is on the cards, there are many different reasons why you might be considering a new vehicle.
And for every reason you might have, there’s a different way of acquiring the brand new car of your dreams. When looking for the best deal, a common habit of those fairly new to buying is to shop around based on the price tag splashed across the windscreen. What those people are missing, however, is that over 60% of people in the UK are using some form of new car finance package to purchase or lease their vehicles, meaning they’re more concerned with the amount due to be paid each month than the price of the car brand new.
For those not used to this terminology, or buyers new to the market, some questions worth answering here would be, ‘what is car finance?’ and, ‘why do people use it?’
Well, firstly, car finance provides an alternative to the outright purchase of a car. It is, more often than not, used as an umbrella term for a number of different options, the most common being personal contract purchase (PCP), hire purchase, car leasing and contract hire. The options attract people for various different reasons – some either prefer the flexibility of being able to pay instalments over a set period, others may not have the cash upfront to purchase the car there and then in the showroom.
Another factor behind the popularity of these finance methods is that, after three to five years, the novelty of any new car generally begins to wane and many drivers look to exchange and upgrade to a newer model. More important for most is that the value of the vehicle drops almost from the moment you first put the key into the ignition. Indeed, the average depreciation rate of a car after three years is around 60% according to the AA, with a 40% drop in value occurring in the first year! With car leasing, in particular, the buyer doesn’t own the car but rather leases it for three to five years, at the end of which they hand over the keys and move on to a new model.
Business owners, large and small, are increasingly taking out contract hire plans that see them get huge benefits when it comes to road tax and VAT exemption. Moreover, the cost of depreciation over a fleet of company cars can do bad things to anyone’s balance sheet, so the fact that owners can just trade them in for new models after the agreed loan period means they save considerable sums on the cars’ values.
Car leasing and contract hire are just two options of many that are specifically designed to help out different people in different circumstances. So, if you’re unsure about the best way to go about financing your new car, be sure to look at all your options before simply cruising round the showroom looking out for windscreen tags.