Car finance for beginners

[Fingerbobs]

I am lucky enough to be thinking of getting a new car and am looking at options for paying for it. As far as I can see they are:

1. put down (fairly chunky eg 5-6k) cash deposit, get car loan from bank or similar, hefty monthly payments, car is mine at the end of the loan period say 4 years
2. PCH ‘deal’ - put down similar deposit, pay 3.4% apr, at the end of 4 years I can pay the ‘balloon’ last chunk or hand it back and move onto another deal
3. lease - smaller upfront cost (first 9 month payments for eg), then smaller monthly payments. End 4 years hand it back and so long as mileage is ok and it’s not totally knackered, walk away.

What I can’t get my head round is why you would do 2) instead of 3)? It looks so much more expensive and it’s still not fully yours. Is there an obvious reason I’m missing?
Really grateful for any insight/experience. Last time I bought a car was 10 years ago and that was my first so this is not my specialist subject...

Whatever you do you’re paying for the depreciation. Getting a loan and keeping the car for 6 years is undoubtedly the cheapest option. As for options 2 & 3, work out the total cost over that 3/4 year period and shop around. DW has a 0% PCP which is cheaper than leasing the same car.

If you do go for a finance deal through a dealer haggle, haggle and then haggle some more.
Our 4 year deal was coming to an end and we were looking at either refinancing our current car or upgrading to a new one. Through a few emails back and forth I managed to get the £1,000 deposit knocked off, 5,000 miles pushed up to 10,000, monthly payments reduced by £20, 2 extra services thrown in for free and a £250 TUI voucher.

There’s a lot they can do on price but most people just accept what they’re offered.

Wow - that’s really helpful, thanks. I will grit my teeth and haggle!

PCP is usually an expensive way to borrow, but you can end up with a nicer car for the cost per month vs traditional hire purchase, which is why it is popular. Think of it as being similar to an interest only mortgage, as you don’t own the car at the end of the term.

If you can afford to buy a car without borrowing money then that’s best, as otherwise you’re paying interest to own a heavily depreciating asset. However, most can’t do this so if you must borrow then personally I’d say shop around the dealers and the banks for a traditional loan where you own the car once it’s paid off.

Yeah best bet is number 3.
But really if you could get an outright loan from the bank with low interest rates l would do that.

You could get a really decent second hand car for much better value over the long run.

*PCP is usually an expensive way to borrow, but you can end up with a nicer car for the cost per month vs traditional hire purchase, which is why it is popular. Think of it as being similar to an interest only mortgage, as you don’t own the car at the end of the term.

If you can afford to buy a car without borrowing money then that’s best, as otherwise you’re paying interest to own a heavily depreciating asset. However, most can’t do this so if you must borrow then personally I’d say shop around the dealers and the banks for a traditional loan where you own the car once it’s paid off.*

There are lots of variables though. If you want to drive a new car every three years then a PCP with zero or very low interest rate can be a better bet than buying outright as you can earn more on your capital. One other advantage of PCP over leasing is that it’s often less costly to get out of a PCP than it is a lease, you can trade a PCP and make up any negative equity, with a lease you may have to pay up to 90% of the outstanding rentals to terminate early.