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How to finance a new car


From time to time, most of us who need a car also need to consider when to change it.  There are some folk who are wedded to their vehicle, come what may, and will happily spend all their waking hours under the bonnet fixing a hole because they are enthusiasts.  Been there, done that.  There’s not much that I don’t know about 1956 Land Rover engines or Morris Minor gearboxes.  But that was years ago and cars today are all computerised requring complex equipment to maintain.  Then there are some folk who follow the creed of keeping their anonymous and boring set of wheels almost until the eponymous objects fall off – they don’t care what they drive as long as it is cheap.

We are neither of such families.  True, given the money, I have my favourite dream car but for the moment we have accepted the inevitable and drive a nice, economical but fairly small car, mainly because we do very few miles almost entirely in the city.

The first thing to consider is whether to buy – possibly with part-exchange – or to lease, by which I include all similar approaches where you pay monthly, possibly with an upfront cost of a few month’s lease, then hand the car back after (up to) three years.  Some plans include the facility to buy while others specifically exclude this.

If cost is a concern, we need look no further than most businesses – better ones run a fleet of fairly new vehicles.  These are nearly always leased.  What is it that applies to business but doesn’t apply to individuals?  A major reason of course is accounting – a vehicle that is owned will appear as an asset on the business while one that is rented will not.  A business can also reclaim the VAT (sales tax) on the rental for a vehicle that is used 100% for business but not on one that is purchased.

Otherwise money is a common issue for business and private individuals and here leasing has an important advantage – you don’t have to lay out all the money up front (or borrow it) as monthly leasing charges are a lot lower than servicing a loan.

Assuming you don’t have the money in your back pocket, how do you finance a new car?

In the first instance you need to have available flexible car finance options.

But which option to choose?

We believe that you should lease, if you want:

  • the latest new vehicle
  • lower monthly payments (or the opportunity to drive a more prestigious car)
  • lower running cost (better fuel consumption, lower maintenance)
  • the latest safety features
  • a vehicle always under warranty
  • to forget about MOTs and stuff
  • to free up cash flow
  • to avoid trading and selling used vehicles

and for businesses, you want:

  • the vehicle off the balance sheet, particularly to keep lines of credit free
  • to be able to reclaim some or all of the VAT (sales tax)

But you should buy if you:

  • either can part-exchange a recent car, have the whole purchase price or don’t mind borrowing
  • prefer to build up trade-in or resale value
  • like the idea of ownership
  • don’t mind the cost of repairs/MOT after the warranty has expired
  • prefer to drive the same vehicle for many years spread out the cost

The decision is yours really.  The only thing to realise about leasing is that as you don’t actually own the vehicle and are committed to returning it, the leasing company has to make an estimate of the future value when the lease terminates so estimates of mileage are important.  If you go over the estimate, there are always penalties, as well of course if you scratch or otherwise damage the car.  You may also have to get a document should you want to take the vehicle overseas to show that you are entitled to use it.

As Tim Ferriss says, don’t own anything – rent it if you need it!  Of course renting a car every day you need it may be a bit far – can you always tell when you need to get a new appliance because the old one has failed?  To many of us, a car is fairly useful or essential.

We looked at the cost of motoring last year and then made a silly error – we bought the car after the expiry of the lease. This we then tried to sell to no avail and eventually ended up going to a car sale website which promised rather more than it delivered.   We have included further tips on buying cars  here.

Do you buy or do you lease your cars?

photo credit: pedrosimoes7 via photopin cc