There’s no set rule on how much one should spend to buy a car. However, according to expert advice on Finder, you should apply the 20/4/10 rule. This rule allows you to make a 20% deposit on a vehicle and repay your loan in four years, while spending only 10% of your monthly income on car expenses. While making cash payment for a luxury automobile or a quality used car sounds ideal, it may not be practical if you’re on a tight budget.
Given today’s car brokers and auto shops have developed different car financing products, you could choose to pay for your vehicle in monthly installments. Each financing option has pros and cons, so choosing the perfect one can be challenging. To help you choose the right auto financing options, check out this explanation of how car-buying schemes work.
Hire Purchase
This financing option works like a conventional car loan, meaning you pay a minimum down payment of 10% for your desired vehicle. You’ll then make a series of monthly payments with a fixed interest rate. After the last installment, you become the legal owner of the vehicle.
Benefits of hire purchase include zero limits on the mileage you can cover annually, you can get qualified for financing even with a bad credit score, and you get the freedom to set payment terms based on your financial status. Like any other financing options, hire purchase has its disadvantages. For example, you’ll only have total ownership of the vehicle once you pay the last installment. Also, the financing company can repossess the car if you can’t keep up with monthly installments.
Personal Loan
This car-buying scheme involves borrowing the money you need to purchase your dream vehicle outright from the auto dealership. You’ll then repay the loan to your bank or private lender over a specified period. Note that the interest rate for the loan may be high, but you don’t have to worry about paying a deposit. Applying for a personal loan can be cheaper than hire purchase, but you need to find the best deal.
This process involves comparing the cost of cars. Auto experts suggest using online car buying portals that provide prearranged pricing. Online auto buying programs like Costco and Sam’s Club help you know the price of a car without the having to bargain or visiting your local dealership. Once you have price estimates of your dream vehicles, you can arrange your finances to determine how much you need to borrow, then apply for a loan pre-approval.
Personal Contract Purchase
A PCP or personal contract purchase finance revolves around MGFV (minimum guaranteed future value) of a vehicle. It allows buyers to pay a down payment of between 0% to 30%, then low monthly installments over a fixed timeline. At the end of this contract, you can make a balloon payment or lump sum to buy the vehicle outright. Alternatively, you can sell the car privately or return it to settle the balance. Personal contract purchase is beneficial for individuals who want to change car models after a short duration.
Buying a vehicle is a big financial step, and you’ll need to decide if you’ll pay cash to buy your dream car outright or opt for auto financing. Today’s auto dealers and lenders offer different car-buying schemes, including hire purchase, personal loans, and personal contract purchase. You can also finance your car purchase using your credit card as long as the limit is sufficient, sign a lease agreement, or refinance your mortgage.