Debt
Car finance and what it actually costs
The monthly payment is the wrong number to compare, and the structure of the agreement matters more than the rate.
Vehicle finance is sold on the monthly payment, which is the number most easily manipulated and the least informative.
The main structures
Which behave differently.
Hire purchase: the vehicle is paid for in instalments and becomes yours at the end.
Higher monthly payments, straightforward, and you own an asset.
Personal contract purchase: lower monthly payments covering depreciation, with a large optional final payment to own the vehicle.
At the end you pay the balloon, return the vehicle, or trade in any equity against a new agreement.
Most people take the third option, which is the model's purpose — a cycle of continuous payments.
Personal contract hire or leasing: renting for a term, returning the vehicle, never owning it.
Simple and never builds an asset.
Personal loan: borrowing to buy outright, owning from the start, with the vehicle unsecured against the loan.
Frequently the cheapest total cost and requiring the best credit position.
The total cost comparison
How to compare properly.
Add the deposit, all monthly payments, any fees and any final payment.
Subtract the value of what you own at the end — which is the vehicle for hire purchase and loans, and nothing for leasing.
That figure, over the term, is what the arrangement costs.
Comparing monthly payments alone systematically favours arrangements with balloon payments and no ownership.
The conditions that catch people
Particularly in contract purchase and leasing.
Mileage limits, with per-mile charges for exceeding them that accumulate substantially.
Fair wear and tear standards, assessed on return, where charges for damage are a common source of dispute — photographing the vehicle at handover is worth doing.
Servicing requirements, which must be met to avoid charges.
Early termination charges, which can be substantial.
Negative equity, where the vehicle is worth less than the outstanding finance, which restricts options and is common early in an agreement.
And the requirement for comprehensive insurance, which is a real ongoing cost.
Depreciation
The actual cost of car ownership.
New vehicles lose a substantial proportion of their value in the first years, which is the largest single cost of running one and which is invisible because it is not a payment.
Which is why buying a vehicle a few years old transfers that cost to someone else.
Depreciation varies enormously by model, fuel type and market conditions, and the used market for electric vehicles has been particularly volatile.
And a vehicle bought outright and kept for many years has a far lower annual cost than a series of financed vehicles, which is the arithmetic the industry does not present.
The running costs
Which frequently exceed the finance.
Insurance, which varies enormously by vehicle, driver and location.
Fuel or charging.
Tax and any local charges.
Servicing and maintenance.
Tyres, which are a substantial recurring cost.
Repairs, which rise with age.
Parking and tolls.
And breakdown cover.
The total annual cost of running a car is frequently far higher than people estimate, which matters when comparing against alternatives.
Buying used
Practical points.
Check the vehicle's history for outstanding finance, write-offs, mileage discrepancies and theft, which paid services do inexpensively and which is essential.
A vehicle with outstanding finance can be repossessed even after you have bought it, which is a genuine risk of private purchase.
An independent inspection for anything expensive.
Service history.
And understanding that buying from a dealer generally gives more consumer rights than buying privately, which is worth something.
Do you need one
The question worth asking.
For households in areas with public transport, the total annual cost of a car compared with public transport, occasional car hire, car clubs and taxis frequently favours not owning one.
For households where a car is necessary, the question becomes which car and how financed rather than whether.
Two cars where one would do is one of the larger avoidable household expenses.
And the calculation should use total annual cost rather than the monthly finance payment, which understates it substantially.
If you are in an agreement you cannot afford
Options exist.
Contact the lender, who has obligations towards customers in difficulty.
Voluntary termination rights exist in some jurisdictions once a proportion of the total has been paid, allowing return of the vehicle without further liability — this is a valuable right that is not always volunteered.
Selling the vehicle and settling the finance, if there is equity.
Refinancing at a lower rate.
And free debt advice, which will assess whether the vehicle is essential — since a car needed for work is treated differently in debt advice from one that is not.
General information only, not financial advice. Agreement terms and consumer rights vary by country — read the agreement and contact a free debt advice service if you are struggling.
