Car Fianance

Options ? Passports ?

It is believed that a bright young person in the marketing department of a very well known multi national vehicle manufacturer invented this wheeze some twenty or so years ago. But was it good car finance for the non-business customer?

At that time the new car business was having a tough time. Economies had gone into a downturn in the late 80's and early 90's and the resulting economic pressures had resulted in new cars becoming very expensive relative to incomes. And good car finance was harder to come by. So to prevent their acquisition becoming unaffordable, the wheeze was to pitch the monthly payment at an affordable level.

I remember at the time the magic bullet was to be £199 a month. This of course was too low to be a finance payment on a conventional hire purchase agreement (See the glossary of terms page).

As this was to be aimed at the general public, as distinct from the business user, the end of the agreement would leave the customer still owing half the value of the car to the finance company. To overcome this potential problem, the dealer would buy the car back, providing the customer bought another new car.

A lovely concept but with some serious flaws - for the car buying customer that is !
Yes it gives budgeted motoring, albeit in a limited way, but with such inflexibility, getting out of this sort of agreement early can have severe financial penalties! Beware if your circumstances change during the period of the agreement. Your ability to keep payments at an increasing level – every time you change your vehicle - drive your ability to maintain this contract, since you have only bought half a car.

The finance cost can be very high as there are  effectively two finance agreements running in parallel. One to loan you 50% of the vehicle for the 3 years, or however long the agreement runs, and the other to finance the 50% reducing balance.

So when the agreement ends you could be in a position of having to begin the process from scratch as there may be very few surplus funds for your part exchange. In other words, when you trade the vehicle into the dealer you may get in part exchange only the agreed minimum amount, leaving you little or no surplus deposit to go forward with the next purchase.

It was very successful in that if you were in secure employment and your circumstances did not change, you could just keep paying and always be driving a new car. And providing new cars did not go up in price very much.

In my opinion the strength of this type of finance is also its weakness. But a conventional U.K. Car Hire Purchase agreement says what it does on the tin. You hire the vehicle for the duration of the agreement and at the end you purchase the vehicle for a fee usually £5.You can settle the agreement at any time by paying it off and you can even do this out of the proceeds of its sale .
In my professional opinion you are better off to make your saving up front by purchasing a 6 , 12 ,18  or 24 month old vehicle but buy all of it not just half ! That’s good car finance I think.

Passports are for travel and your options are best kept open.