Tilly

I dont know if everyone has looked at the Q7 thread but I was explaining how dealer finance works and I thought it a good idea to make a topic about different types of car finance for reference. This is something I posted on another site so I'm simply copying and pasting as it took ages to write but hopefully it'll clear things up and make things easier for anyone thinking of delving into the world of finance or leasing as lets face it the chances are buying a car will be the second biggest financial investment in your life after buying a house so here goes...

You have four main options as far as financing is concerned:

Contract hire - you keep the car for x amount of months, hand it back at the end and walk away. Road tax is included for the full duration, payments are subject to vat. If you want out of the car early it can be very costly, if your circumstances could change or you arent happy with keeping your cars for longish/set lengths of time dont go near.

PCP (personal contract purchase) - essentially the same as contract hire bar the the idea that you only get road tax for the first year and rather than just hand the car back you have the option to keep the car and pay a final payment or as before, hand it back and walk away.

Hire purchase - A straight forward finance agreement. Simply a deposit followed by x amount of monthly payments (between 12 and 60 dependant on your contract length) 60 months is most popular. Monthly payments are not subject to vat. Think of it as a normal loan but specifically for a car.

Lease purchase - A finance agreement similar to hire purchase only with a balloon payment at the end of the contract, these are between 12 and 48 months long. The best option IMO is 48 months not because people intend to keep their car that long but because it allows you to spread depreciation out over a longer term in effect making it easier to manage. The final payment SHOULD be based upon the cars future trade value at x amount of miles and x amount of months old, obviously varies depending upon the customers choice of contract length and their annual mileage. The reason I say the final payment SHOULD be based upon the cars future value is mainly because most finance brokers/companies like ourselves would. However be careful with dealer finance because they're not experienced enough, it is not their primary job and so they tend not to know all the ins and outs and in most cases you could walk into a dealership and tell them you've been quote £600 a month for a new SL AMG, never going to happen in a million years but they'd match it or at least come very close simply by jacking your final payment up. When customers say "ah but im not so stupid as to not notice that" true but stealers have this covered... They will say they'll swap you into a new car at any point whenever you fancy a change without you having to pay thousands... nice of them isnt it how? by rolling over your literally thousands of poundsworth of negative equity you will have accumulated over the term onto your next motor and increasing your monthly payments. The dealer will then have done as they promised Please please please make sure you check final payments and dont fall for their bull****, it causes problems with my customers scared to enter another LP agreement lol!

Now, with contract hire and PCP, coming out of a contract early can be very expensive. With a lease purchase or hire purchase whenever you want out you simply request a settlement figure and sell or part ex the car and pay the difference between the cars value and the remaining finance. The key to having a sucessful, economical and straight forward lease purchase agreement is the balloon final payment. The lower the final payment is, the sooner you can exit the car without being in negative equity but obviously the lower the final payment is the higher your monthlies will be so you need to find the correct balance between the two. 99% of the time a lease purchase is the cheapest way of approaching any vehicle.

With a PCP you will pay a premium over a lease purchase because you always have the option that at the end of the contract you can hand it back and walk away with clean hands, this is the best option if you're dealing with a ****e finance company (mainl dealer finance) but if they have half an idea of the difference between their **** and their elbow and actually know how to build a sucessful finance agreement then a lease purchase will be better for you.

Any of you who have looked into PCP's will have noticed the final payment on a PCP is a GFV (guarantee'd future value) So if its guarantee'd, you wont lose money right? Exactly. So what we do is take the best of both worlds. When quoting lease purchase figures we run a PCP quote to establish what final payment to use. Although we ourselves cannot guarantee the value on our lease purchase system, we have great faith in the PCP system we use that is provided by a major funder and have been using their figures for years with no problems, so yes there is always a risk but extremely minimal a these systms work on a worst case scenario. If a customer is not happy with a quote they can specify a lower final payment. We will never allow a customer to specify a final payment more than a few hundred pounds over the PCP system as we do not want to cause financial difficulties for people no matter how many of them want a porsche for £10 a month!

As you can see it is more in depth than people first realise so your choice in quotes is very important and al of this I am tping is a stereotypical generalisation, obviously everyones scenario is different so without discussing this with people individually I can only offer guide. Although a lease puchase may sound the most risky, in the right hands it is the cheapest and best option.

So... finance personally or through a business?

personal finance - you have to pay VAT on contract hire agreements. The other figures are "as is" with no vat element. You cannot reclaim anything back

VAT registered companies - can reclaim 50% VAT on contract hire agreements on cars, 100% on commercials. Being VAT registered does not affect a lease or hire purchase unless it is a commercial vehicle where the company can reclaim the VAT in full but the VAT must pe put down in full + a little extra as a deposit.

Any company - on a hire purchase or lease purchase can claim against depreciation of the car, 25% of the monthly payments upto a maximum of £3500 per annum. This is done by offsetting the cars depreciation against the companies taxable profits, something your account will sort for you but 25% per month is a BIG saving.

Limited companies - This is just another option worth considering, If a director takes a vehicle in their personal name and it is used for business miles, they first of all avoid company car tax and for the first 10000 business miles (per annum) they can reclaim 40 pence per mile, 25 pence there after. Again based on average mileage, if used for 10000 business miles per annum, that is £4000 per year, again a big saving.

In the case of our company (but not all) to achieve the lowest finance rate on lease purchase you should put down 3 payments as a deposit. It is possible to specify your own deposit whether it is more or less than the aforementioned 3 payments but it is a slightly increased finance rate.

With a lease purchase of hire purchase - There are two types of agreement, regulated and non regulated. If the total amount of credit borrowed is below £25k it is a regulated agreement, above that threshold is none regulated. the difference being, with a regulated agreement it is possible to calculate a future settlement figure at a particular date before entering the agreement. With a non regulated agreement, a finance company can charge pretty much what they want to a certain extent but they still have rules to follow so providing you go with a reputable finance funder you shouldn't have problems.

A regulated deal will display the finnce rate on the documents whereas the a non regulated deal will not. We ourselves opt to work with flat rates when quoting rather than APR because it is easier to compare quote. APR changes at the slightest of things, the more money you put down as a deposit, the higher the APR... a change in balloon payment means a change in APR. An admin fee? alters APR yet again so it is almost impossible to get like for like quotes however throughout it all no matter how much you change the figures the flat rate will remain the same so when shopping for the best deal, work with he flat rate rather than APR. If one company offers a lower APR than another, it does not necessarily mean it is a better deal!

I hope I haven't confused you too much and if you need me to clarify anything please feel free to ask me any questions.
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