A Guide to Buying Your First Car

Buying your first car is a significant milestone. With all the choices out there, it can be hard to know where to start. Before you go out and fall in love with a car, there are some things you should consider.

What Costs Should You Budget For?

The first thing you need to do before you even start to look at cars is to figure out what your budget is. How much can you afford to spend per month on your car? How much money do you have for a deposit?

This figure needs to cover the cost of the car. Unless you can afford to buy the car outright, you will be making monthly payments on it. However, your budget also needs to cover the road tax, insurance, fuel, MOT (if the car is over three years old) and maintenance costs.

The amount of road tax you will pay depends on the type of fuel and the size of the car. If you select an electric vehicle, then there will be no road tax. There is also no road tax for vehicles built before 1973, but the running costs for these cars make them a poor choice for a first car.

Once your car is over three years old, you need to get it an MOT every year. You will need to do this before you can get it taxed. It would be best if you also planned to get your car serviced every year to make sure you keep on top of the maintenance. It will help you to catch things like wear on your tyres before it gets too bad.

Tip: Some Dealerships will offer you service packages as part of your purchase. This can be better value than paying when you need them. For new cars, not getting a service may invalidate the warranty.

Which Cars Are Good For New Drivers?

When it comes to picking the exact car, there are a few main factors to consider, these are; insurance group, brand and features.

The insurance group of the car will determine how expensive it is to insure your car. New drivers and those under the age of 25 will find insurance is very expensive. You will also see a steeper increase in costs are you go up the vehicle insurance brackets. Generally speaking, you should look for cars that are cheap to repair and have smaller engines, as this will put them into a lower insurance group.

The brand of the car is mostly a matter of personal preference. Some people have very strong opinions about car brands. If you don’t, then don’t worry about it. There aren’t any really bad ones out there as they all have to meet specific safety and economy standards.

The last, and perhaps most important thing to think about is what features do you need. Do you need a five-door car? Do you need something with great miles to the gallon? Is an electric or a hybrid can an option for you; could you charge it easily? Do you need to be able to fit a certain amount of luggage in the back? Do you want the best safety features going?

Once you have all of these things in mind, you can start looking to see which cars tick all the boxes.

Tip: Try and decide with your head and not your heart. Cars can be expensive to run, and the novelty can wear off fast.

Should You Buy Used or New?

Ultimately this is up to you. There is something very tempting about buying a brand new car. But, you should be aware that the moment you drive the car off the lot, it loses around 10% of its value. It then loses about 20% of its value every year for the next five years. This can mean that the amount you owe for a loan to buy the car can be more than the car is worth.

There are real advantages to buying a new car. For example, you can get the exact specifications that you want. Your car will also have the most up to date technology and safety features.

If you care about the resale value of your car, and not losing out financially, then you should look at used cars. If you want the best technology and have exacting needs, then a new car will be the better choice.

Tip: Nearly new cars, such as demo cars can be a good compromise. They have more modern features but don’t have the same price tag.

What Should You Check For If You Are Buying a Used Car?

When you’re buying a used car, you need to take a little more time to check the vehicle over; you want to make sure no nasty surprises are waiting for you. Here are some key things to look for;

Mileage – On average, the mileage for a car is 10,000 miles per year. If the car you are looking at has something wildly different than this, ask why.

Take a test drive – Make sure you drive the car. This gives you a chance to feel how responsive the breaks and steering are, and how easily it changes gear. Don’t forget to try reversing the car as well, to make sure that everything works the way it should.

Try the gadgets – Make sure to try out all the features the car is supposed to have. If it has rear sensors, make sure they work. Try the radio, the heated seats, the GPS, etc. Check the tyres have enough tread and that all the lights are working.

Service history – Ask to see the service history and MOT. Ideally, the car should have a full-service history, showing it has been maintained every year. If there are any gaps, then you should expect the price to be much lower.

Tip: Aswell as offering finance deals, some used car dealers will offer warranties on their used cars which can give you peace of mind in the event a fault developed on the car

Should You Haggle?

When it comes to buying a car, you should expect to haggle. Most dealers can be flexible on the price of the car. When they can’t move on the cost of the vehicle, you should ask about getting something extra thrown in. This could be a spare tyre or a deal on a service plan.

Before you talk to the dealer, do your homework. Check how much you should be paying. Make an offer at the lower end of the range you found. If you can’t get a price you’re happy with then walk away. It’s not worth overpaying for a car, you will regret it later.

Tip: Be polite, friendly and charming, and you’ll get a better deal. If the dealer likes you, they’ll do more for you.

Car Finance Jargon Buster

Buying a car is a big financial commitment. You want to be confident that you know what you are signing up to and that it the best option for you. This can be difficult when there are strange terms and acronyms flying around, like MSRP, PCP and balloon payments. If you find it all a bit confusing then you are not alone. To help you find your way through your finance deal here are some of the most common terms explained.

Administration/Acceptance Fee

This is a payment that you make at the start of your financial agreement. It goes to the lenders to cover their administration costs.

Agreement Term

This is the time you have to repay the loan. It is usually 1-5 years.

Annual Mileage

Some types of finance agreement have a limit on the number of miles you can drive per year. If you exceed this amount, you will have to pay an extra fee. You often see these in Personal Contract Hire deals.

APR/Interest Rate

APR, this stands for annual percentage rate. It tells you how much extra you have to pay back. It’s basically the charge for borrowing the money. It is quoted as a percentage.

Arrears

If you miss a payment, the money that is overdue is called ‘arrears’.

Balloon Payment

If you have a Hire-Purchase finance deal, the last payment is called a balloon payment. It is the payment that allows you to take ownership of the car. It is also often larger than you monthly payments have been, thus the name.

CCD

CCD is a European directive. It stands for Consumer Credit Directive. It is a set of rules that provide customer protection when buying items on credit.

Cooling-Off Period

As part of the CCD, you must be given a period of time in which you can change your mind about the deal you have signed. This should be a minimum of 14 days.

Credit Agreement

This is just the general name for any agreement between a borrower and lender.

Credit History

Your credit history is a record of all the times you have borrowed money.

Credit Score/Rating

Your history of borrowing in the past is analysed to see how risky it might be to lend you money. If you have borrowed money and paid it back on time, then you will have a high score, and you will find it easy to get a loan. If you have had problems in the past and missed payments then you might have a bad score, and this can make it harder to get a finance deal.

Credit Search

This is when lenders look at your credit history to decide if they will give you a loan or not.

Deposit Contribution

Some dealers will offer a deposit contribution to try and encourage you to buy a car. This just means that they will put in an amount of money towards your deposit. It’s like knocking money off the price. By putting it into the deposit though it means that your monthly payment can be smaller.

Early Settlement

If you decide to pay off the whole amount you have left early, this is called an early settlement.

Equity

Equity refers to anything you own that has value. Once you have paid off the loan on your car, you will own it, and it can be sold of money, so it is considered equity.

FCA

The Financial Conduct Authority (FCA) is the independent organisation that is responsible for overseeing all financial services in the UK. Their role is to protect consumers.

Finance Agreement

This is the contract you have with the finance company. It should outline the details fo the agreement, including any payments you need to make.

Gap Insurance

If your car is written off or stolen, then the money you receive from your insurer will be equal to the value of the vehicle at the time you lost it. Gap insurance provides you with the difference between the value of the car and its original cost. It covers the depreciation of the car.

GFV

GRV stands for Guaranteed Future Value. It is what the car will be worth when the finance agreement ends. It is used to determine the balloon payment.

Guarantor

If the finance company has any concerns that you might not be able to pay the loan, they may ask you to have a guarantor. This often happens with younger buyers or people with no credit history. The guarantor will be responsible for paying the debt if you miss a payment.

Hire Purchase

This is an arrangement with the finance company where you hire the care until you have fully repaid the loan. You make a deposit, followed by monthly payment and a final balloon payment. After this, you own the car. You may see this shortened to HP.

Lease Purchase

This is a type of finance agreement where the car is used to secure the loan, so you don’t own the car until you make the final balloon payment. You may see this shortened to LP.

MSRP

MSRP stands for the manufacturer’s suggested retail price.

Negative Equity

This is a situation that happens when, due to depreciation, the value of the car is less than the amount you have left to repay on the loan.

Part Exchange

This is an arrangement where the dealer takes your old car as part payment for your new car.

Personal Contract Purchase

This is a type of finance agreement that uses the car as security for the loan. This means that you don’t own the vehicle until the final balloon payment is made. In this agreement the final payment is optional. You can just return the car instead. You may see this shortened to PCP.

Personal Loan

With this personal finance deal, you will take a loan out for the whole amount of the car. With this, you own the car from the start.

Residual Value

This is the value of the car at the end of the agreement.

Secured Loan

This is where you use something as collateral, like the car or something else with a high value. If you miss a payment then the finance company can take whatever you use as security. Doing this can give you a lower interest rate.

 

What Is Personal Contract Hire

There are lots of different ways to get yourself a car. Personal contract hire is a method that allows you to have a car without owning it. It gets called a range of different things depending on where you look. You may see it referred to as a personal lease or simply as leasing. Leasing is very common in the US and is beginning to grow in popularity in the UK too.

What Exactly Is Personal Contract Hire?

Personal Contract hire is basically an agreement where you pay monthly for the use of a new car. You are basically renting it for a set amount of time. At the end of the contract, you give the vehicle back. Because you are not working towards owning the car, personal contract hire tends to have relatively low monthly payments.

Tip: Because you will not own the car at the end, this can be an expensive form of car finance. However, it is also one of the cheapest ways to get into a new car, especially top range models.

How Does Personal Contract Hire Work?

In a lot of ways, personal contract hire works a lot like renting a property. You start by paying a deposit. The deposit is usually the equivalent of around six months of payments. You then pay a set amount each month for an agreed period of time. Contracts are usually for one to four years although if you shop around you may find different options. Generally speaking, going for a longer-term contract will give you smaller monthly payments.

Once you have selected your car and got all the extras that you want, you will have to pay a processing fee. This is typically in the range of £150-£200.

As part of your contract, you will agree on a milage for the term of the contract. Take care when you agree to the limit as you will have to pay a fee for every mile you go over the agreed limit.

Some leasing deals will also include road tax and break down cover. If you are lucky, you might be able to get servicing included as well.

Tip: Check to see if the price includes VAT or not. A lot of these deals are aimed at businesses so the quote may exclude VAT.

What Happens At The End Of The Contract?

When the lease ends, there are two options. You can either return the car or you can extend your lease.

If you decide to hand the car back, then it will be checked over. As long as it is in good condition and you have not gone over the agreed mileage then there will be nothing more to pay. There will be a fee for every mile you go over the limit. This is usually somewhere between 5p and 10p per mile. However, for more expensive cars this fee can be even higher. If the vehicle is not in good enough condition to be sold then you may have to pay for repairs to any dents or scratches.

Tip: If you are interested in extending your lease, contact the finance company a couple of months before the end of the contract. You may be able to negotiate a lower monthly fee, as the car is now older.

What If You Want To Get Out Of The Agreement Early?

It will depend on your contract. In most cases, you will have the option to pay a termination fee to return the car before you get to the end of the lease. The size of the payment will probably depend on how much of the lease is left. The earlier you try to terminate, the higher the fee will be.

Tip: If you just stop paying it will affect your credit score. Try to plan out your finances, so you don’t have to pay to end the contract earlier.

What Are The Benefits Of Personal Contract Hire?

  • This is the cheapest way to get access to a car, especially for top-end models.
  • You don’t have to worry about road tax or breakdown cover.
  • The car will be covered by the manufacturer’s warranty for the whole of the time you have it.
  • The whole thing is very simple. You pay a single monthly fee to use the car and then hand it back at the end.
  • You don’t have to worry about depreciation when you drive the car off.
  • If you have a VAT registered business, you can claim the car as an expense and reclaim half of the VAT.

What Are The Negatives Of Personal Contract Hire?

  • At no point will you own the car. You will also never have the option to buy the car.
  • Even though you are putting money in every month, you will have nothing to show for it at the end of the contract term.
  • If you have an accident and the car is written off, you may end up having to pay a fee to the finance company. This is to cover the difference between how much the insurance company and the finance company will value the car at.
  • You have to be careful about your milage as you will have to pay if you go over the agreed limit.
  • You have to pay extra to get exactly what you want.

Where Can You Get A Personal Contract Hire?

There are two options for finding a personal contract hire deal. You can arrange a contract directly at some dealerships. Not all dealerships offer this option as it is not widely used in the UK yet. The other option is to go through an online broker.

When you look for an online broker, make sure that they will work with private individuals as some will only work with businesses. The broker will match you to a leasing company who will buy the car. The broker will deliver the car once you make your first payment.

Tip: Take some time to look for average prices from a couple of online brokers before you talk to a dealership. That way you know if you’re getting a good deal or not.

What Is Hire Purchase?

When it comes time to buying a car you are offered a lot of different options to pay for it. One of the methods that had been around the longest is Hire Purchase. It is a way to spread the cost over your car over time. Around 20% of vehicles are bought this way. Before you decide if Hire Purchase is the right option for you here are the key points.

What Exactly Is Hire Purchase?

As the name suggests, Hire Purchase is a system where you essentially hire the car and then have the option to buy it at the end of the term. This means that until you make your final payment, the finance company owns the car. Only when the last payment is made do you own the vehicle. This means that the car is used to secure the loan. If you miss a payment, the finance company can repossess the vehicle.

Tip: If you choose this option, you can’t sell the car until you have paid the final payment. So choose your finance period with care.

How Does Hire Purchase Work?

You make a deposit to secure the car, usually around 10%, but it can vary. The finance company agrees a time period with you, to pay the remaining cost of the car. Remember that you will also be paying interest on this amount. You then make monthly payments for the agreed time. At the end of the period, you pay a final fee and take ownership of the car.

Example

If you are buying a car that costs £15,000 and agree a three-year term with 5% APR and a £200 final purchase fee.

You pay an initial deposit of 10% – £1,500

You make monthly payments of £403.93, over three years – £14,541.48

Then make a final payment of £200 to take ownership of the car.

You will pay a total of £16,241.48

Tip: Dealers will often offer low or 0% APR agreements, however, to be eligible for these you may need to make a much larger initial deposit.

What If You Want To Get Out Of The Agreement Early?

If you find that you no longer need the car, or you just can’t afford it anymore, then there is a way to get out of the agreement before the end of the term. If you have paid off half of the original loan then you can return the car at the end of the agreement. If you haven’t yet paid off half the amount but still need to return the car, you will have to pay off the remaining amount to reach the halfway point.

To leave the contract early, you should make sure that the car is in good repair. If there are any maintenance or repair costs linked to the vehicle, you will be expected to pay those.

Tip: If you do leave the agreement early make sure to keep all the paperwork, so you can prove you haven’t just defaulted on the loan.

What Are The Benefits Of Hire Purchase?

  • The terms are often highly flexible. You can choose a deposit and repayment term to suit you.
  • Some dealers will make a contribution to your deposit if you opt for Hire Purchase.
  • There are some 0% APR deals out there.
  • The cost of the car is spread out, so you don’t need the whole amount upfront.
  • As the loan is secured against the car, you might be eligible for Hire Purchase even if you have been declined for other types of loan.
  • If the car is faulty, it is the finance company’s responsibility to fix it.

Tip: The rate you are offered will depend on your credit score, the better you score, the lower the rate.

What Are The Negatives Of Hire Purchase?

  • You don’t own the car until the end, so you can’t sell it before the term expires.
  • The monthly payments and APR are often higher than other finance options.
  • You can’t make any modifications to the car until the end of the term.
  • If you miss a payment, the finance company can take your car.

Tip: Some online companies offer Hire Purchase deals, which may be better for you than getting it through the dealership.

Is Hire Purchase Right For You?

Hire purchase is, in most cases, the more expensive finance option. However, it is the right choice in a number of situations.

If you have a bad credit score and would be unable to get a standard car loan, then Hire Purchase is a good alternative. This is because the car is the security for the loan. The finance company don’t do as deep of a credit check because there is less risk for them.

If you can get a 0% deal, then Hire Purchase becomes a good choice. You can generally only get these deals if you have a large deposit. But this can allow you to spread the cost a little without paying for the credit.

If you are likely to want to change your car sooner than the agreed term then this is not a good choice. You might end up paying more to get out of the contract and be left with nothing to show for it.

Tip: Making payments towards your Hire Purchase agreement will have a positive impact on your credit score.

 

Car Finance Options Explained

Buying a car involves many decisions. One of the most important is about how you are going to pay for the car. Knowing your options and which will be best for you before you get to the dealer is a good idea. Here’s the rundown on the main options available to you.

Personal Loan

You can get a personal loan to cover the whole amount of your car. You would get this from a bank or a building society. There will be no deposit. You make fixed monthly payments until you pay back the loan. You will be able to pick a term length to suit you. You will pay interest on the money you borrow.

Advantages of a Personal Loan

  • A personal loan will likely be the cheapest way to borrow money.
  • You will own the car from the start, so you can do what you want with it.

Disadvantages Of A Personal Loan

  • The monthly payments will likely be higher than other finance methods.
  • If you have a poor credit score you might be turned down when you apply.

Hire Purchase

This is an agreement between you and the finance company. You make a deposit and then a series of monthly payments. At the end of the term, you make a final payment. Until you make the final payment you do not own the car, the finance company does.

Advantages of Hire Purchase

  • The car is used to secure the loan so you this may be an option even if you have a low credit score.
  • You can choose not to buy the vehicle at the end of the agreement and instead return it. This can be a good option if the car has depreciated a lot and is no longer worth the amount you have left to pay.
  • If you can pay a large deposit, you might be able to get a 0% interest loan.

Disadvantages of Hire Purchase

  • If you miss a payment, the finance company can repossess the car. If you have paid more than a third of the cost of the vehicle, they will need a court order to do this though.
  • If you change your mind and wish to cancel the agreement you may need to make payments up to half the owed amount before you can get out of the contract.
  • You don’t own the car until you make the final payment. So you can’t sell the car or make any modifications until the end of the agreement.

Personal Contract Purchase (PCP)

This is similar to hire purchase but has a few more restrictions. You still make a deposit followed by monthly payments, and at the end, you have the option to buy the car. When you make your agreement with the finance company you will agree on yearly mileage limits. If you exceed them, you will have to pay an extra fee. You will also have to pay extra for any damage to the car, such as scratches or dents.

The final payment you make will be larger than the other monthly payments. The amount you pay is based on the GFV (Guaranteed Future Value). This is basically the resale value of the car. If you don’t want to keep the car you can use this value towards buying a new car.

Advantages of PCP

  • If the car is worth more than the final balloon payment, then you can use the extra value to get a better deal on your next car.
  • This is a good option if you only plan to keep the car for a couple of years, as you can walk away and return the car once you are halfway through.
  • The monthly repayments are generally quite low.
  • You can often get maintenance costs thrown in.

Disadvantages of PCP

  • The finance company may limit the things you can do in the car. For instance, you may only be allowed to take the car out of the country for seven days and no more.
  • To get out of the deal early, you need to have paid off half of the cost of the car.
  • If the car is not in good condition when you return it you may have to pay extra fees.
  • If you go over the mileage limits, you will have to pay extra fees for every extra mile. The cost per mile can range from 3p to 55p.
  • This can be one of the most expensive forms of car finance.

Personal Contract Hire (PCH)/ Leasing

This is essentially a long term car hire agreement. At no point will you own the car. There is no deposit to pay. You just agree on a yearly mileage limit, the length of the agreement, and your monthly fee. It is basically the same principle as renting a flat. Your payments go towards paying for the use of the car, so you don’t build any equity buy can walk away from the car easily.

At the end of your term, you can return the car. Alternatively, you can renegotiate a new monthly fee and keep the car longer.

Advantages of PCH

  • This is probably the cheapest monthly payment to get behind the wheel of a car.
  • You can lease very expensive cars relatively inexpensively.
  • You don’t have to worry about depreciation as it has no effect on you.
  • Your costs are simple and fixed.
  • If you have a business, you can claim back half the VAT.

Disadvantage of PCH

  • You never own the car, and you never get the option to buy it.
  • Even though you are making monthly payments, you won’t be building any equity, so there is no payout at the end when the car is sold.
  • If you damage the car or exceed the milage agreement, you can be hit with hefty charges.
  • If you have an accident and the car is written off, you will be on the hook for any difference between the value the leasing company has and the value the insurer has.
  • You may have to pay extra to get exactly the car you want.