The days when ‘discount for cash’ or an HP agreement were the only real routes to enjoying your own car are long gone. Ownership is no longer the only option, whether you’re looking for a new motor as a private or business user. Graeme Kidd looks at the options
Good deals can still be done for cash, although these days, the briefcase full of used notes, like the chequebook, has pretty much been replaced by Chip and PIN driven plastic, whether you use a credit or a debit card. But is there a place for plastic on the dealer forecourt?
Credit cards can be handy, but they’re pretty punitive when it comes to the interest rates they charge. It’s not smart to use your credit card for high-ticket items unless you know the cash will be coming in to pay off the card in the short term, but your credit card could do the trick to fund a deposit or an initial payment on a contract. Think of your credit card as a ‘bridge’ that allows you to do a deal now, but that will be refunded in the near future, perhaps by the sale of your current motor, and you won’t go far wrong.
All sorts of loans are on offer. Tune in to any satellite TV channel and you’ll find commercials busily trying to sell you money as if it were a product. Your credit history and the kind of security you can offer will depend on whether a lender will want to do business with you in the first place, and then at what interest rate.
On a three-year loan to a home owner with a good credit rating, commercial lenders are likely to charge around 6.9 per cent APR. This means it would cost under £2,400 to borrow around £22,250, to pluck the sort of money you might have to stump up for a brand new BMW 320d ES saloon, which we’ll use as an example. For three years, you’d be paying off around £685 a month, but you’d own the car (hold legal title) from day one. At the more expensive end of the personal loan market, if you have a poorer credit history you could be hit for an APR around 18 percent, a cost around £6,150 to borrow the money, and you’d be paying £790 a month for three years. And don’t forget, there might be punitive early redemption penalties, of up to six months interest, and set up/arrangement fees. Always read the small print, however you finance your purchase.
Sometimes known as Conditional Sale (when there is no Option to Purchase Fee involved), is a long-established route to consumer credit and is, in effect, a loan secured on the car that the borrowed funds are being used to buy. It’s as straightforward as it gets, the traditional way of funding vehicle purchase on credit, and you don’t have to worry about a mileage contract.
You start with a deposit, then pay monthly sums but don’t own your motor until you have paid the final payment at the end of the contract period – it belongs to the finance company all the way through. The bigger your deposit up front, the lower the monthly payments will be. A variant of Hire Purchase, sometimes called Lease Purchase, requires a much higher final payment, but involves lower monthly payments until that final payment. A so-called “balloon payment” is agreed at the start of the contract, and defers some of the cost to the end of the agreement, based on the mileage you contract to do – effectively it sets a likely value for the car at the end of the contract, but not a guaranteed value. This payment has to be made if you want to own the car, or you can part-exchange the vehicle for a new one.
Also known as Personal Contract Hire or Operating Lease. As the word ‘hire’ implies, it means that the customer uses the car, and pays fees to use it, but never actually owns it. At the end of the contract period, the customer stops using the car, gives it back to the leasing company and walks away.
This approach is ideal if you are ‘risk averse’, and is suited to companies and to individual (non-VAT registered) drivers who want to be able to budget with certainty. Include a maintenance package and a breakdown and recovery service package, which can include home start, relay and a replacement vehicle, and you will be guaranteed painless motoring at a fixed price. Providing, of course you don’t break the terms of the contract by abusing the vehicle or driving a significantly greater mileage than you contracted for. There’s no faff or fuss about trying to sell the vehicle at the end of the contract, no worries about residual values or additional charges (providing you haven’t abused the deal or the car) and no horsetrading about part-exchange value need to go towards a replacement vehicle.
All of this means that the administration surrounding the use of a vehicle is reduced – you just pay the monthly contract fees along with fuel, and insurance costs, and so business resources can be used to best effect in building and running the business, and not applied to dealing with vehicles. And for a company, running a vehicle under a hire contract means that the vehicle does not have to be accounted for as an asset – it is the hire/leasing company which owns the vehicle, and it appears on their balance sheet. Keeping capital assets, such as vehicles, off the balance sheet can enhance gearing ratios, but that’s a topic beyond the remit of WhatDiesel! The monthly rental (which includes costs relating to maintenance, service, and depreciation in value) is fully tax-deductable by a hiring company on cars that cost under £12,000; a sliding scale applies for more expensive vehicles. Capital allowances for the vehicle cannot be claimed by the hiring company.
PERSONAL CONTRACT PURCHASE (PCP)
It’s a way of keeping monthly payments low by moving your obligation to pay a significant proportion of the cost of the car to the end of the loan. There’s a contract period and an initial payment to make, as well as monthly payments, but the monthly payments are lower than they would otherwise be, because during the life of the contract, you only cover capital and interest repayments of part of the full cost of the car, and face a much higher final payment than you would under standard Hire Purchase or Lease Purchase agreements. You don’t own the car during the life of the agreement, but at the end of the agreement you have three options:
1 – to pay off the chunk of the cost that was deferred, and keep the car – you may wish to sell it privately, releasing cash towards your next purchase;
2 – providing you have stuck to the agreement in terms of looking after the car and not exceeding the mileage significantly, you can just give the car back and owe nothing (this is the equivalent to a Operating Lease or Personal Contract Hire deal);
3 – start a new agreement on another car and use your ‘old’ car as a trade in – if the trade-in value is higher than the guaranteed future value, then you have funds for the deposit on your next car deal. It works because an ‘agreed value’ or guaranteed future value is calculated for your car at the start of the agreement and will apply at the end of the agreement, providing you have stayed within mileage limits and looked after the vehicle appropriately. This is a minimum value, and if the car is in particularly good condition, or perhaps has lower than anticipated mileage, then the actual value may be higher. You are liable only for the agreed value. PCP has become popular for several reasons, not least because can be a tax-efficient opt-out from a company car scheme.
MORTGAGE MY MOTOR
If you are a homeowner with a current mortgage, and particularly if there’s a good bit of equity in your home, you may be able to extend your mortgage to raise money. But don’t forget that getting a bigger mortgage will ‘last’ for the life or term of the mortgage, so while the additional monthly payments on a loan of that Beemer-buying £22,250 might be attractively low, the overall cost of adding on to an existing mortgage is worth looking at closely. Think about the ‘term’ of the loan – will you still be paying a higher mortgage once the new car is long gone?
On the upside, you’ll get a good interest rate and should get a quick decision from the lender who already knows you, but you’ll potentially be putting your house at risk to fund a depreciating asset – a vehicle. Your call!
However you choose to fund your new car, be sure to go shopping to get the best deal on credit as well as on the metal. You’ll find useful, impartial and accurate advice online at www.financingyourcar.org.uk – a website provided by the Finance and Leasing Association whose membership consists of all leading providers of car finance and enforces a Lending Code. It also operates a consumer complaints scheme, and will work with you to resolve a dispute with one of its members – but you can always go to the Financial Ombudsman Service if things go really wrong with a credit agreement.
GETTING SOME OF THE VAT BACK BACK HMRC
Formerly Customs and Excise, is involved in every new vehicle purchase in the UK – and if you buy a new car, you can’t avoid being charged 17.5 per cent on the price, whoever you are. Whatever the VAT-inclusive price of your chosen new motor is, almost 15 per cent of the gross price you pay goes straight into government coffers as VAT. That’s over £3,250 on a £22,000 car – a 3 series Beemer for instance.
If you are not registered for VAT, then tough – whether it’s a private purchase or for business use, if you pay the VAT on a new car, you can’t claim any of it back. Ouch.
But even if you are a VAT-registered business, it’s not all plain sailing. The only way you can claim 100 per cent of the VAT you pay on a new car these days, is if you can prove that the car is used 100 per cent for business, with no private use apart from closely-defined ‘incidental’ private use.
For most businesses, that’s not so easy to do. Yes, it is possible to demonstrate that a car owned by a business is a ‘pool car’, but it’s notoriously tricky to do effectively, and you are bound to be wrangling with your accountant and VAT inspector and may be in for an unpleasant financial surprise some way down the line.
As the VAT man sets it out, a car only qualifies as a pool car (and 100 per cent refund of the VAT in its purchase price when new) is if all the following conditions are satisfied:
(a) it is available to, and actually used by, more than one employee;
(b) it is made available, in the case of each of those employees, by reason of their employment;
(c) it is not ordinarily used by one of them to the exclusion of the others;
(d) any private use by an employee is merely incidental to their business use of it; and
(e) it is not normally kept overnight on or near the residence of any of the employees unless it is kept on premises occupied by the provider of the car.
For the full ins and outs (and a flavour of the battles you may have to fight in order to prove that a pool car is a pool car and not a VAT scam, nip over to www.hmrc.gov.uk and search on “pool car”.
However, a company that provides contract hire or leasing services on a car, is clearly using that car 100 per cent for business purposes – it’s charging a customer for the use of that car.
Because there is no quibble about business use in such a case, the hire or leasing company can claim back 100 per cent of the VAT included in the new car’s purchase price. So, the theory goes, the finance company can claim back almost 15 per cent of the gross purchase price of a new motor and then reflect the lower, net price it pays for the new car in the monthly rental payments it charges.
When the car is leased or hired out to a customer on a contract, VAT is charged on any initial payment and on each monthly payment, over the contract period.
Contract Hire and Finance leases can be attractive to a VAT-registered company entering into a deal because it can claim 50 per cent of the VAT paid to the leasing/hiring company for the finance element of the monthly rentals, and 100 per cent of the VAT on the maintenance element of those payments, without having to argue about pool car status and faff around keeping detailed records for the vehicle’s usage. (And if you’re comfortable with proving that it’s a pool car, then you can claim 100 per cent of the VAT on the finance element.)
Of course if you are an accountant, or a VAT whiz in your own right, and don’t mind keeping meticulous and accurate records of business and personal mileages, you can opt for a more complicated route to getting some of your VAT back, but for most people – life is just too short. There are other tax, accounting and cashflow benefits and downsides to Contract Hire and Finance Leases.