Factoring Trade Finance: Car Finance - What You Need to Know About Dealer Finance

3/30/19

Car Finance - What You Need to Know About Dealer Finance

Car financing has become a big business. A large number of new and used car buyers in the UK purchase vehicles based on financial types. Maybe in the form of bank loans, dealer finance, leasing, credit cards, trusted 'Mother & Father Banks', or various other forms of finance, but relatively few people actually buy cars with their own money again.

A generation ago, private car buyers with, say, £ 8,000 in cash to spend will usually buy cars up to a value of £ 8,000. At present, the same £ 8,000 is more likely to be used as a deposit on a car that can be worth tens of thousands, followed by a monthly payment of up to five years.

With various manufacturers and dealers claiming that anywhere between 40% and 87% of current car purchases is based on financial types, it is not surprising that there are many people jumping on the car finance cart to take advantage of the buyer's desire to have the latest car, the most striking available within their monthly cash flow limit.

Car Finance - What You Need to Know About Dealer Finance
Car Finance - What You Need to Know About Dealer Finance

The appeal of car financing is very easy; You can buy a car that costs far more than you can, but (hopefully) can manage a small amount of cash monthly for a certain period of time. The problem with car financing is that many buyers do not realize that they usually pay far more than the face value of the car, and they do not read the good print of the car financing agreement to understand the implications of what they 're registering for.

For clarification, this writer is not pro or anti-financial when buying a car. What you have to watch out for, however, is the full implication of car financing - not only when you buy a car, but for the full financial term and even after. The industry is highly regulated in the UK, but regulators cannot make you read documents carefully or force you to make wise financial car decisions.

Financing through dealers


For many people, financing a car through the dealer where you bought the car is very convenient. Often there are also national offers and programs that can make car financing through dealers an attractive option.

This blog will focus on two main types of car financing offered by car dealers for private car buyers: Purchasing Purchase (HP) and Personal Contract Purchase (PCP), by briefly mentioning one third, Lease Purchase (LP). Rental contracts will be discussed on other blogs immediately.

Financing through dealers
Financing through dealers

What is Buy Purchase?


HP is like a mortgage in your home; You pay a deposit in advance and then pay the rest for the agreed period (usually 18-60 months). After you make the last payment, the car is yours officially. This is how car financing has been operating for years, but now it is starting to lose support for the PCP options below.

There are several benefits to Employed Purchases. Easy to understand (deposit plus a number of fixed monthly payments), and buyers can choose deposits and the time period (payment amount) according to their needs. You can choose a period of up to five years (60 months), which is longer than most other financial options. You can usually cancel the agreement at any time if your circumstances change without massive penalties (although the amount owed may be more than the value of your car earlier in the agreement period). Usually, you will pay a total less than your cellphone than PCP if you plan to look after the car after the finance is paid off.

The main disadvantage of HP compared to PCP is higher monthly payments, which means the value of the car you normally can afford is lower.

An HP is usually best for buyers who; plan to keep their car for a long time (i.e. - longer than the financial period), have a large deposit, or want a plan for financing a simple car without a shock at the end of the agreement.

What is a Personal Contract Purchase?


PCP is often given another name by manufacturing finance companies (for example - BMW Select, Volkswagen Solutions, Toyota Access, etc.), and is very popular but more complicated than HP. Most of the new car financing offers advertised today are PCP, and usually, dealers will try and push you towards PCP through HP because it tends to be better for them.

Like the cellphone above, you pay a deposit and make a monthly payment for a certain period of time. However, monthly payments are lower and/or shorter (usually a maximum of 48 months), because you don't pay for the entire car. At the end of the period, there is still a large part of the finance that has not been paid. This is usually called GMFV (Guaranteed Minimum Future Value). Car finance companies guarantee that, under certain conditions, the car will be worth at least as much as the remaining financial debt. This gives you three options:

1) Return the car. You won't get money back, but you don't have to pay the rest. This means you have rented a car effectively all the time.

2) Pay the remaining amount owed (GMFV) and save the car. Given that this amount can be thousands of pounds, it is usually not a viable option for most people (which is why they finance cars from the start), which usually leads to ...

3) Exchange some cars with new (or newer) ones. The dealer will assess the value of your car and take care of financial payments. If your car is worth more than GMFV, you can use the difference (equity) as collateral for your next car.

PCP is best suited for people who want a new or almost new car and fully intend to change it at the end of the agreement (or maybe even faster). For private buyers, it is usually cheaper than renting or contracting to rent financial products. You are not bound to return to the same factory or dealer for your next car, because any dealer can pay finance for your car and conclude the agreement on your behalf. This is also good for buyers who want a more expensive car with lower cash flow than usual with HP.

The disadvantage of PCP is that it tends to lock you into your car replacement cycle every few years to avoid large payments at the end of the agreement (GMFV). Borrowing money to pay for GMFVs and caring for cars usually gives you a very little monthly payment than starting over with a new PCP with a new car, so it almost always moves the owner to replace it with another car. For this reason, manufacturers and dealers like PCP because it keeps you coming back every 3 years instead of looking after your car for 5-10 years!

What is the Rental Purchase?


LP is a little hybrid between HP and PCP. You have deposits and low monthly payments like PCP, with a large final payment at the end of the agreement. But, unlike PCP, this final payment (often called a balloon) is not guaranteed. This means that if your car is worth less than the amount owed and you want to sell/exchange it, you have to pay any difference (called negative equity) before thinking of paying a deposit on your next car.

Read small print


What is absolutely essential for anyone who buys a car with finance is to read the contract and consider it carefully before signing anything. Many people make the mistake of buying a car in the financial sector and ultimately unable to make their monthly payments. Given that your financial period can last for the next five years, it is very important for you to consider carefully what might happen in your life over the next five years. Many sports cars that are funded very large must be returned, often with serious financial consequences for the owner, because the pregnancy is unexpected!

As part of purchasing a car in finance, you should consider and discuss all the various financial options available and make you aware of the pros and cons of various car financing products to ensure you make informed decisions about your money.

Stuart Masson is the founder and owner of The Car Expert, an independent car buying agent and not based in London for anyone who wants to buy a new or used car.

Originally from Australia, Stuart has had a passion for cars and the automotive industry for almost thirty years and has spent the past seven years working in the automotive retail industry, both in Australia and in London.

Stuart has combined his extensive knowledge of all matters relating to cars with his own experience in selling cars and providing a high level of customer satisfaction to bring unique and personal car buying agents to London. Car experts offer special and special adviser to anyone who is looking for a new or used car in London.

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