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Owning a Vehicle

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Finance Information

Introduction to car creditChoosing what suits youCredit ChecksBank LoansHire PurchasePersonal Contract HireConditional SalePersonal LeasingPart ExchangeCancelling Credit agreementsPersonal Contract PurchaseAPR

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PreperationNegotiationGetting The Deal

Introduction

Credit for cars is one of the biggest areas of consumer credit after home mortgages, and the market is split between traditional loans and other finance schemes such as Hire Purchase and Personal Contract Hire. In order to decide which type of loan you need, you will need to consider what your plans are for the car. The important question before entering into a credit agreement or taking out a loan is 'Can I really afford it?? If you're in any doubt at all about whether you can meet the costs then it is advisable not to sign it. Choose a cheaper loan, a credit agreement with lower instalments, or even a cheaper car that you can buy outright with a one-off payment. Understanding the options and the jargon is the first step in negotiating the finance.

Choosing the right finance for you

Decide whether you want to own the car at the end of the repayment period, or whether you will want to swap it for a newer one. Calculate what you will actually be paying for the car in total - the actual cost of the finance scheme - and how much deposit you can afford. If you don't have much money for a deposit, consider personal contract hire schemes. These work like a hire agreement, and at the end of the payment period the car is handed back to the dealer. If you can afford a substantial deposit, a hire purchase scheme is worth considering. The monthly payments will be lower, and you can own the car at the end of the period. Remember that all long-term payment schemes are based on the initial purchase price of the car. By the end of the payment period, the car will be worth considerably less! Most hire purchase or personal leasing agreements set mileage restrictions. Exceeding these can incur financial penalties.

This guide outlines the main options available, and tackles some of the most frequently asked questions about car finance. What you need to know

Don't forget to check if the interest rate is fixed or variable.

With some schemes you're not buying the car but renting it on a long-term basis!

Decide how much you can afford to pay per month. Paying off a loan adds to your costs, so try to repay it as quickly as possible - total interest charges are lower for short-term loans.

Borrow only what you can afford to repay, and always try to put as much of your own money as possible towards buying the car.


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Loans

There are two main options. The simplest is a loan from a bank or building society, where an amount is borrowed to pay for the car outright, and this amount is paid back, plus interest over an agreed period, to the lender. Always compare like with like - if you need to borrow ?5,000 and would like to repay the loan over three years; ask each lender for details of the APR (Annual Percentage Rate) on a loan of this amount. The size of the monthly repayment over 36 months, and the total amount repayable. The other is to opt for dealer financing and there are several different options available:

Unsecured Loan - Buying a car outright with an unsecured personal loan can be a convenient way of making your purchase. Unsecured loans are normally repayable on a monthly basis, although you can now pay some on weekly basis at a fixed rate of interest. They are not linked to any security, such as your property, hence the use of the term unsecured. The upshot of this is that the lender will have little option but to sue you to recover their money in the event that you fail to repay the loan in full. Remember to look at the rates closely as some car sales companies will make more out of the loan than they do from the car. This is why they try to pressurise you into taking their finance.

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Hire Purchase

Hire Purchase (HP) or conditional sale The conditional sale is common at franchised dealers. You pay an initial deposit, then the balance plus interest is divided into fixed instalments over a fixed period. The vehicle is sold to you provided all the payments are made, the car is comprehensively insured, and the car is maintained in good condition. You only own the car when the last payment is made. With Hire Purchase the terms are similar, but you hire the car with a final 'option to purchase' fee payable at the end of the contract. Hire Purchase Hire Purchase (HP) is a well-established method of financing the purchase of assets by businesses. Under a HP agreement the customer will pay an initial deposit, with the remainder of the balance and interest paid over a period of time. The finance company which provides finance is known as the "creditor". It will purchase the asset on behalf of the customer, who is known as the "hirer" The finance company owns the asset until the final installment is paid for the asset.The benefits of Hire Purchase are that the assets can be used immediately whilst allowing repayments to be staggered, giving companies a better cash flow HP agreements are easily negotiated and available The most up to date technology can be hired and used to increase company productivity and efficiency The hirer can recover the writing down costs and VAT on the assets There is a clearly defined financial commitment from the outset Security is on the transaction that has been financed thus requiring no additional commitment from the customer HP is not repayable on demand unless the customer defaults on the agreement

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PCH

PCH - Personal Contract Hire If you are interested in a nearly new car, you may consider Personal Contract Hire (PCH), also called Personal Leasing. This is a long-term rental where maintenance is covered, but ownership of the car never passes to the person paying the instalments. This may be suitable if you are self-employed - ask your accountant for advice. Documentation fees are added to payments at the beginning, or end of the agreement. This administration cost should be clearly detailed and can be anything from ?50 to ?100.

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PCP

Personal Contract Purchase (PCP) You pay a deposit (up to 20% of total), followed by agreed number of low monthly repayments for up to three years. A final payment must then be made. This is agreed at the start and is known as the Guaranteed Minimum Future Value (GMFV). At the end of the agreement that you can keep the car, hand it back, or part-exchange it for another new car. PCP is available for new and nearly new cars only. If you want to keep the car you must pay the GMFV. If you hand it back, you owe nothing more, however you won't have your deposit or payments refunded. The disadvantages are that the GMFV could be quite a high amount (especially if the dealer has been over-optimistic about the resale value of the car). You could end up with neither car nor money, you would have to maintain the car to the manufacturer's standard, and your mileage may be restricted. If you part-exchange the car, the dealer will value it. If it's worth more than the GMFV, he'll put that amount towards the deposit on your next car. But if it's worth less you won't have to make up the shortfall.

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Conditional Sale

This is the most common form of car finance after PCPs and is what most customers describe as Hire Purchase. As the name implies, Conditional Sale means that the vehicle is sold to the customer subject to certain conditions, which typically include:

All the payments are made, and made on time
The vehicle is comprehensively insured at all times
The vehicle is kept in good condition

The customer starts by paying a deposit followed by the balance plus interest being paid in fixed installments over a pre-determined contract period typically 36 months. If all the conditions are satisfied, full ownership passes to the customer when the final installment is paid.

As the customer does not own the vehicle until all the conditions have been met, the lender still has the right of repossession, should the customer be in default under the terms of the agreement.

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Personal Leasing

Following the Value Added Tax changes in August 1995, the motor finance industry developed Personal Leasing Plans PLP.Personal Leasing is just a glorified term for renting the car. You will not have to worry about M.O.T's or repairs as this is all included in the lease agreement and at the end of the lease, you return the car. One important thing to look for is the amount of miles you are restricted to each year so make sure it is enough for your needs. If you go over the mileage they will charge you around 5p per mile, so it can be very expensive.

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Part Exchange

Part Exchange - If you have a car already, give it a good clean inside and out when you go to part exchange it. This can make a large difference to the price the dealer will give you. Most places will part exchange your old car against another vehicle. You are often best trying to sell your car privately first, as you will normally get more for it.

Loans and personal leases are both solutions for people without a large amount of freely available money to buy a car but which one is right for you depends on your own preferences. One of the key differences is the cost. You'll often find that for the same car, a loan works out cheaper in the long run, but has a higher monthly payment than leasing. This is particularly true for the more popular cars that are mass-produced and therefore depreciate in value quicker. However, for brand new, prestige cars that depreciate at a slower rate, you may find that a personal lease is cheaper in the long run.

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The right finance - at the right price

Always read the terms and conditions of the scheme and shop around. Firstly, there is the Annual Percentage Rate (APR) which all lenders must quote by law. The lower this figure is, the cheaper it is to borrow the money. Then there is the Repayment Period. For example, ?200 a month over three years (total repayment ?7,200) is ?1,200 more than ?250 a month over two years (total repayment ?6,000). The faster you repay the money, the less it costs you. Finally, compare any finance arrangement fees and penalties that could be imposed for exceeding a mileage limit, repaying early or returning the car in poor condition. You need to compare the cost of the car had you bought it outright for cash with what you will pay at the end of the agreement. The difference between the two figures will give the total cost of borrowing the money. Go with the best deal, but first read all the small print.

About Credit

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Credit checks

The lender will ask for relevant facts concerning home, mortgage, income, bank and credit card accounts and details of any other outstanding debts. The lender acquires information from a credit reference agency, which use public records to confirm your identity and address. They check for debts registered over the previous six years and any county court judgements (CCJs) against you. Any information on you shared by finance companies; banks and other lenders will be assessed. Should credit be refused, ask the finance company why your application was turned down, and whether you have failed the credit checks. You have the right under the Data Protection Act to search your record at the relevant credit reference agency (the lender must supply their details) and to correct any errors in your record. There is no 'blacklist' as such; just a process called 'credit scoring' based on many different factors. You can find out what these factors are by viewing your credit record. Most lenders use similar methods of credit scoring, but different lenders have different loan policies. You may be turned down by one lender but accepted by another ? although you'll probably pay a higher rate of interest if you are rated a high-risk borrower.

What if the car is faulty?

Keep paying the instalments, otherwise you will be in breach of the credit agreement. First ask the dealer to rectify the fault. If the car is still within warranty, repairs will be carried out at no cost to the dealer or you. Buying a car via a credit agreement means that the lender has a responsibility to ensure the quality, fitness and description of the vehicle before entering into a contract. Also, as the car belongs to them, it is in their interest to rectify any major faults.

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Cancelling a credit agreement

Most credit agreements can be terminated, provided you act quickly. There are details on the contract document and notice of your rights to cancel should also follow a few days after signing. However, if the documents are signed on the dealer or lender's premises, you lose the 'cooling-off' period in which you can cancel without penalty. The agreement can be legally terminated at any time, if you are not the owner of the car until the last payment is made (as is the case with Conditional Sale and Hire Purchase agreements). Provided you have paid half the credit price of the car, you can simply hand it back. However, you will lose all the payments you have made to date, and will be liable for further charges if the condition of the car is poor. If you haven't paid half of the credit price of the car, you will lose the car and still be liable for any outstanding payments. Generally, this is the worst case scenario of a credit agreement.

Summary

Although most people only think of their bank or the dealer for finance, shopping around for a number of quotes for car finance providers can save you money. Try to compare three different options to secure a good deal in perhaps the same way you would for car or home insurance.

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Car Dealers

Some experts have suggested that you initially not inform the dealer how you plan to finance your car that you wait until a price has been established, then tell them that you want to lease. Don't do it! It's old advice and it doesn't work well anymore.

Up front, let the salesperson know that you want to lease, that you consider yourself well informed about leasing, that you are knowledgeable about the car model you've selected, that you want to discuss selling price, not monthly payments, and that you are not interested in playing games.

Let the dealer know that if you can get a good fair deal, you'll lease today. Otherwise, you're willing to walk out and find another dealer or leasing company who will give you the deal you want.

The three key advantages you have and should use in any negotiation are:

Your time to prepare

Your ability to shop around

Your ability to walk away

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Prepare to Negotiate
If you've already done your homework, this process will be as smooth as silk. If you haven't, the process could be long and painful, not to mention expensive.

First, you should negotiate the lease price (cap cost), having a specific target price in mind (see Know What to Pay). Don't let them tell you that price isn't negotiable in a lease. It's an old trick. Unless you're wanting a top-selling car that's in short supply, price is always negotiable.

Since the dealer only controls selling price, don't expect to get very far trying to negotiate residuals and money factor, which are controlled by the leasing company, for which the dealer is just acting as an agent. You can, however, ask if they work with other leasing companies who might offer better terms or you can shop for another leasing company, bank, or credit union on your own. Or let one of the new online services, such as LeaseCompare, do the work for you, for free.

Next, you should ask about any rebates, advertised specials, factory-to-dealer incentives, or discounts that would reduce your cap cost. Tell them what down payment, if any, you would like to make and negotiate a fair price for your trade-in (you should already know its wholesale value). Ask about any acquisition fees, disposition fees, or other charges that would affect your cost.

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So You Got the Deal

Finally, ask them to calculate your monthly payment amount, less sales tax, based on all the figures that have been agreed upon. While the salesperson is gone to check with the Finance and Insurance (F&I) Manager to calculate the numbers (salespeople don't make these kinds of calculations), do your own calculations. When he returns, it's very important that you check their payment figure against your own.

Make sure you're using the same cap cost, residual, money factor, and term as the dealer is using. If there is a discrepancy, have them explain their calculations in detail, step-by-step. Often, the difference is a "mistake," some previously unmentioned extra charge, or you weren't given the correct credit for your trade-in.

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When No Negotiations Are Required

Now that you know the essentials of negotiating a lease deal, you should also know there are times when little or no negotiating is required.

When you find good lease deals being advertised in the newspaper or on TV (see Where Are the Deals), these are packaged deals jointly sponsored by the dealer and the leasing company. These deals are usually already good deals and usually require no further negotiating. In fact, even if you wanted to, negotiating is often not possible due to the special conditions required to offer the deal. Typically, every element of the deal lease price, term, money factor, residual, vehicle make and model is already set and can't be changed.

Usually these advertised deals are better than you could negotiate yourself. So, keep a sharp eye on those ads.

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Negotiating Tips

Following are some important tips that may help you in your negotiations:

Always negotiate price, never monthly payments

Always negotiate price UP from dealer's cost, not DOWN from the sticker price

Never let the dealer tell you that lease prices are not negotiable

Never, ever tell the dealer what monthly payments you can afford

Always come prepared with the dealer invoice price for the vehicle you want

Always come knowing what your trade-in is worth

Never let the dealer tell you your source of invoice prices is wrong

Never, ever give the dealer a deposit on a car during negotiations

Never give the dealer a chance to "lose" the keys to your trade-in

Don't sign any kind of "purchase/lease agreement" until you've settled on a deal

Never reveal your attraction to a vehicle ("I just love that car") during negotiations

If you're not comfortable with the salesperson, ask for another, or leave

Always give yourself the option of walking out if negotiations don't go your way

Let the dealer know up front that you are knowledgeable about leasing

If you sense the salesperson is playing games with you, ask them to stop

Don't agree to extended warranties, credit insurance, or add-on services

Always check the dealer's monthly payment figures against your own figures

Generally, it's best to deal at the end of the day, at the end of the month, on a weekday, on a rainy day, or any slow period

Never accept an offer to take a car home overnight before you've settled a deal

If you become tired, confused, intimidated, or pressured during negotiations, you're doomed

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