Vehicle Finance Explained – What is the best route?
“If Something you want Appreciates you should own it but if it Depreciates it makes more sense to RENT IT”
Under HP agreements, there’s a deposit to pay followed by fixed monthly payments. The car is owned by the HP company until the final payment – and any ‘option to purchase’ ownership-transfer fee – has been paid. Up to that point, the person making the payments has no legal right to sell the vehicle.
The credit on an HP agreement is secured against the car, only the car can be seized in the event of a default. If you need to sell the car before the end of the agreement, you’ll have to repay the outstanding debt first – and ‘early settlement’ fees may apply.
You have Rights with HP as its regulated under the consumer credit act and allows you to terminate the agreement after 50% of the payments have been made. This can be useful if you hit cash flow problems or things are not going well there is a way out of those payments and if you do it in the right way it won’t affect your credit rating.
With an HP agreement, you hire the car, and have an option to buy at the end. Any agreement which gives you a legal right to ownership at the end of the term is treated as hire purchase for tax purposes, regardless of what the agreement is actually called. You will be treated as if you have bought the car outright at the start of the agreement which means that you can claim capital allowances, giving you a tax deduction up front.
If you have a problem with the vehicle you can sue the lender as well as the dealer. You cant do this with a personal loan !!
Go for HP if you say yes to one or more of these statements:
▪ Eventual ownership is important to you
▪ Your budget and circumstances suit fixed monthly repayments
▪ Your disposable income is likely to decrease over the agreement term (eg if you’re planning a family)
▪ You like low-risk credit secured against the car only
▪ You don’t mind not owning the car until the debt is fully repaid
Borrowing money from a bank, building society or other lender gives you instant ownership of a car.
The annual percentage rate (APR) is the easiest way to compare loans, and essential in working out how much a loan will cost you over its lifetime. If the APR isn’t clearly mentioned (and it should be), then ask for it. The headline rate isn’t necessarily what you’ll get; it can vary, depending on your credit-worthiness.
It’s tempting to go for longer loan periods because that means smaller monthly payments – but you’ll pay a lot more through interest. Be as disciplined as you can about keeping the loan term as short as possible.
The downside of an unsecured personal loan is that any of your assets could be seized in the event of a default on the payments. With dealer finance, only the car is vulnerable to repossession.
Go for a personal loan if you say yes to one or more of these statements:
▪ You don’t have a deposit for a finance deal
▪ You want to own the car outright
▪ You plan to keep it for a while
▪ You don’t want annual mileage restrictions
If you want to own a new car, using your own money to buy it outright makes sense when UK savings interest rates are so low. Buying a car outright is also a sensible alternative to leasing if your mileage is high or unpredictable, because leasing companies will levy high excess mileage charges.
Research is all-important here, because dealers love lazy buyers who haven’t done their homework. There’s no point haggling a good price for your new car and your trade-in if you’re going to throw it all away on poor dealer finance.
Check out the detail on current (and, if you can find them, upcoming) manufacturer finance deals. These might include interest-free offers, low APR rates or deposit contributions.
Don’t fixate on the rate or monthly repayments, though; look at the total repayable amount to understand exactly how much dealer finance will cost you, and compare those whole-term costs with what you can get in the open market.
Nor should you assume that a dealer’s finance rate is set in stone. Everything is negotiable. Take time to go through anything you’re not sure about, and get the exact final offer in writing.
The only thing at risk if you don’t keep up dealer finance repayments is the car. Bear in mind, though, that even with sweeteners such as free servicing deals thrown in, dealer finance will still make money for the dealer, as well as facilitating your purchase. This profit is built into the package somewhere – and you’ll be funding it.
Go for dealer finance if you say yes to one or more of these statements:
▪ You like the convenience of ‘package’ deals
▪ You’re happy to do some cost-comparison research
▪ You don’t want to do the research, but you don’t mind paying extra
Personal contract hire (PCH)
Also referred to as personal leasing. The word ‘Hire’ tells you what PCH is all about.
Basically you’re renting a car for (typically) two or three years, with an agreed mileage limit of (typically) 10,000 miles a year. There’s no option to buy the car at the end of the contract; you just hand the keys back to the finance provider. In effect, your payments are only covering the car’s depreciation.
While you’re running it, you’re responsible for the car’s upkeep. On the plus side, the deposit is low (three or six months’ rental is common), as are the fixed monthly repayments, and you can blunt the impact of repair bills by incorporating a maintenance element into the agreement. Check that a separate manufacturer servicing package won’t be cheaper before you tick that box, however.
Cars that hold their value well are a good PCH option, because the difference in their new and three-year-old values will be smaller, so you’ll repay a lower amount. Cars that plummet in value from new are a bad choice, because you’ll repay a much larger amount.
Just as with PCP, you’ll need to make sure the car is in good condition when you hand it back, or you could face additional fees as the finance firm cleans it up.
For tax purposes, you are not treated as owning the car under a finance lease, and so you would not claim capital allowances during the period of use. However, you would be able to claim for your lease repayments (with a 15% disallowance for cars with emissions over 130g/km). In your accounts, you will usually show ownership of the car and depreciate in the usual way. Depreciation is then allowed in the tax return. An alternative approach is simply to claim the lease payments as tax deductible, which is fine as long as the lease payments arise evenly over time and do not contain a balloon payment at the end.
Go for PCH if you say yes to one or more of these statements:
▪ You don’t want to own a car, or suffer its depreciation
▪ You like being able to change cars frequently
▪ You like the idea of driving better cars than you could normally afford
▪ You don’t mind looking after cars
Personal contract purchase (PCP)
It’s a bit like HP in that there’s a deposit to pay, a fixed interest rate, and monthly repayments over a choice of lending terms, which are usually between 12 and 36 months.
Where PCP differs from HP is at the end of the term. Then you’ll have three choices. You can:
▪ Return the car to the supplier
▪ Keep the car
▪ Trade the car in against a replacement
The first option, returning the car, costs nothing, unless you’ve gone over an agreed mileage or failed to return it in good condition. In either case there’ll be an excess to pay.
Keeping the car means making a final ‘balloon’ payment. This amount is the car’s guaranteed future value, or GFV, which is set at the start of the agreement.
The GFV is based on various factors, including the length of the loan and the anticipated mileage as well as the car’s projected retail value. If you exercise this final buying option, you can of course keep running the car, or you can sell it, pocketing any equity above the GFV that you’ve paid back to the lease company.
If you’re trading the car in, any GFV equity can be used as a deposit towards the next one.
Just bear in mind that the GFV doesn’t always contain a huge amount of equity at the end of the term – so when you’re working out monthly costs, it’s probably wise to factor in a few extra pounds per month that you can put away in preparation for the next deposit at the end of two or three years.
If the car has gone into negative equity – which can happen – you’ll have to find all of that deposit if you want a further PCP. Shorter leases are more likely to come with more accurate GFVs and manufacturers are quite proactive in trying to get you out of a car early if they think there’s scope to get you into a new one on a decent monthly rate; it’s not uncommon dealers to call customers on three-year deals about a year early – because doing a new PCP keeps the buyer tied to that manufacturer for a further period of time.
Go for PCP if you say yes to one or more of these statements:
▪ You want lower monthly repayments
▪ You like the flexibility of options at the end of the agreement
▪ You can confidently and accurately nominate your mileage
Finally, in making your decision, you need to consider your business structure. As a sole trader, any capital allowances you claim will be reduced for personal use. You may actually be better off simply claiming mileage than claiming for the costs of the vehicle. You also need to consider that when you dispose of the vehicle, there may be a balancing charge arising, particularly bad news if you are a higher rate taxpayer at the time.
In general, non VAT registered businesses will usually be better off purchasing cars under HP, and VAT registered businesses will be better using a Finance Lease. However, this all depends on circumstances and you should seek advice to make sure you make the best possible decision for your business. You may be better off buying the car personally, and claiming back mileage from the business.