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Retset

The inside guide to Finance

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This is by Jules. Very good so given it's own section.

Guide to Finance

Lots of forum members have PM’d or emailed me over the past year, asking for advice and what finance product I would recommend for them.

The problem is, that choosing which finance package is good for you can be just as personal as choosing a car to drive. So it’s difficult for me to recommend something, when I know nothing about the person I am recommending to.

I think the question that people really want to ask, but are too embarrassed to is: “I know very little about finance, so how do I know that I won’t be stitched up or ripped off?” We’ll answer this question later.

So what I will do here is give people enough information for them to be able to make their own informed decisions.

First we need to do a quick review of the finance plans available. There are 2 basic types: Ownership or Non-ownership (also called ‘usage’ products) Ownership products will allow you to own the car at the end of the agreement, Non-Ownership products will not, they are purely to use the car for a set period of time.

Ownership products.

Hire Purchase.

The oldest and the cheapest for of borrowing. You borrow a set amount, over a set term, at a set rate.

Benefits.

Simple, easy, very popular and actually quite easy to calculate to the monthly rental using a calculator, so you can check quickly that you are not being stitched up. Easy to budget for, because nothing changes.

Drawbacks

Can be expensive. For example, a £40000 loan over 4 years could give you a monthly payment of £1000.00

Lease Purchase

Similar to Hire Purchase, but you defer a large payment to the end of the agreement. E.g. You want to finance a car worth £20000.00 over 4 years. Your defer a payment of £5000 until the end of the agreement, so you only actually fund £15000 over 4 years, and then pay a lump sum of £5000 at the end.

Benefits.

It will give you a cheaper monthly payment as you are funding less capital,

Drawbacks

The deferred payment is also interest bearing, so you will pay more interest than a Hire Purchase agreement. The deferred payment is not guaranteed, so if your car is not worth £5000 at the end of the agreement, you have to stump up the difference.

Personal Contract Purchase (PCP)

BMW call this ‘Select’, Land Rover call it ‘Freedom’, Ford call it ‘Options’. Whatever it is called, it is all the same thing. It’s pretty much exactly the same as Lease Purchase, except the Deferred Payment is a Guaranteed amount, and it is based on a predicted valuation of the car you want to buy, at the end of the agreement.

The idea being, that at the end of the agreement, you are not out of pocket, as you could be with Lease Purchase.

Benefits.

Deferred payment is guaranteed, so there is no risk to you at the end of the agreement.

Drawbacks

Interest costs are similar to Lease Purchase (i.e. more expensive than Hire Purchase) and there are conditions attached to the condition of your vehicle and the mileage that you drive per annum. If you exceed your contracted mileage, or return the car in poor condition there are penalty charges.

Variable Rate. (Also called Balanced Payments or Base Rate)

Same as Hire Purchase, except that the Interest rate is Variable, and follows the Bank of England Base Rate.

Benefits.

In a market where interest rates are falling, can be a shrewd buy. Good agreement if you intend to settle the agreement quickly, as has the lowest early settlement penalty

Drawbacks

If the market has a rising interest rate (as it does at the moment) you could be stitched up.

Personal Loans

Unsecured lending, so called because the loan is secured on you, not the asset. Essentially the same as Hire Purchase; you borrow a set amount, over a set term, at a set rate.

Benefits.

If you default on the loan, you will be taken to court, but you asset cannot be repossessed. The asset will show as HPI clear, as the finance is not secured on it.

Lots of competition in this sector, so you will always get a low interest rate.

Drawbacks

The asset is not secured by the loan, which means if you are having financial difficulties in general, someone could repossess it to cover their debts.

Non-Ownership (Usage) Products

Contract Hire and Leasing

In General these products are for business users, as VAT can be recovered on them, and all sorts of fancy terms like ‘Write Down Allowance’, ‘Off Balance Funding’ and ‘Depreciation Proof Funding’ apply.

I’m not going to go into these here, as they are complicated and do not apply to private individual purchases, but if anyone wants further information on them, feel free to PM me.

Interest Rates

Always, always, always, get the APR. APR stands for Annual Percentage Rate, and was introduced by the Government (Consumer Credit Act 1974) to standardise the way in which all finance companies quote interest rates (This encompasses Banks, Building Societies and Finance Houses). Be wary, as some garages (Not just BMW ones) will talk about Flat Rates, Notional Rates and Interest Bearing rates that seem low, but in reality are not.

As a general rule of Thumb, the APR is double the Flat Rate, so a Flat rate of 5% sounds great, but in actual fact the APR is closer to 10%

If the person you are talking to will not give you the APR – walk away, you are being stitched up and he doesn’t want to disclose the fact.

The only scenarios where quoting APR’s do not apply, are Variable rate products (where you borrow a set rate over the Finance House Base Rate, and this fluctuates every month in line with the Bank of England, so it is impossible to calculate an APR for the whole agreement) and Contract Hire.

How do I get the best deal?

For someone not familiar with Finance, this is an important question, however it does not have to be a daunting one. More than ever before Dealers rely on finance leads to bolster their income, so your business is important to them. If you walk, they lose income. Remember that you are in control of the sale, not the salesperson.

1, Shop around. Get firm quotes from Banks and other Lenders. Make sure the quotes show the APR’s. Go into the dealer knowing what you want.

2, If you don't know what you want then every BMW dealer has a Finance specialist, called a Business Manager. Whilst they are there to make profit for the dealership, they are also obliged to ensure that you are not pushed into an agreement that is completely unsuitable to you, so use them, talk to them, explain what you want and let the Business Manager do the work for you. Don’t be afraid to admit ignorance or ask him to explain something that you do not understand. Once you have quotes, go away and compare them.

3, You are most likely to be sold PCP to start off with. Why? It’s the safest and most convenient product for you, and at the end of the agreement the dealer will see you when you bring the car back, so it’s an opportunity for him to sell you another car. This does not mean that you have to take PCP – the Business Manager must qualify the sale, which means that he has to ensure he is selling right product for you, to you. If you don't want it, say so.

4, Do not sign anything that you do not understand. If you sign on dealer premises then the agreement is highly likely to be non-cancellable, with no cooling off period.

5, Don’t be afraid to double check figures. Loan Calculators are here for HP. Shop around, go to another Dealer even.

6, If you get a better deal then tell the dealer - give him an opportunity to match it.

7, If you get stuck – PM me. Edit: That's him (Jules) not me (Retset) ;)

Jules ;)

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