Hire purchase or loans to pay for your new car – good idea?
When getting a brand new vehicle, aside from picking which one you want, you have a very important decision to make – how you pay for it.
For a lot of people who want a new car, Hire Purchase sounds like a good option if you don’t have cash readily available.
Hire purchase is just like a loan. You borrow the money you need to make your purchase, and pay it back over a pre-determined period. Once the payments are complete, you own your vehicle. If you can find an interest free option, you will pay no more than if you had the cash already yet you can spread your payments over months, or even years. If you can find an interest free HP offer, this is a great way to purchase your car if you want to spread the payments out. However, it is rare.
The likelihood is that you will have to take out an agreement whereby you pay interest over the term of the agreement. Make sure you shop around – rates vary and can be as high as 24%. You need to seriously consider whether it is worth buying a new car this way if your rates are so high. Taking the depreciation of your vehicle into account, you could end up paying a huge amount of money, yet only recoup a small fraction of what you paid, when you sell your vehicle.
The other issue to consider is that if you skip a payment or fall behind on your payments, you are breeching the terms of your Hire Purchase Agreement so your vehicle may be repossessed, and you end up with nothing but debt.
If you don’t have funds readily available but you are a homeowner, it may be cheaper for you to borrow on your mortgage. Mortgage rates are often hugely lower than the interest rates offered for Loans or HP. If you did borrow the money this way, it would mean you could pay the dealer outright, thus owning your vehicle outright, and you spread the amount over the term of your mortgage.
Regardless of how you decide to borrow the money, you must remember that it is a loan, and you need to repay it – focus on getting the lowest interest rate you can, but make sure your repayments are affordable.
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