There are a couple of ways you can fund a new car and if you are not one of those people who can buy a car outright you will need to find some sort of finance deal. However, even if you have sufficient capital to purchase a new car straight away you will still face the prospect of depreciation.
Cars sold within their first seven years will lose money and any value attached to the car, depreciates considerably over this period. It is estimated that your new car will be worth 20% less the second you take it off the forecourt and this loss on your investment continues over time.
Many people who have brought cars through personal finance agreements or used a dealer arranged finance package find that once they decide to get a new car that they suddenly find themselves in negative equity. This is due to the residual value of the car being considerably less than the outstanding amount owed on the loan.
At this point you are faced with two options, the first and most sensible choice is to continue paying for your car until the agreement is finished, then you will own the vehicle outright and can use the little remaining value as deposit on a new car.
The second option that finance brokers will suggest is that you include the settlement fee in the car as part of the finance package for the new car. So instead of buying a car for say £8,000 your include your £2,000 negative equity and take a loan for 10,000. When you decide to trade in the car in three years time you are still faced with the problem of negative equity, only this time it will have doubled as you already had £2,000 when you brought the car.
The most sensible way to fund a new car is through personal car leasing or contract hire. Previously this has been associated with business vehicle financing but more car dealers are seeing this as a way to provide private customers with new cars too. Instead of buying a new car outright your take out a contract, agreeing to a specific duration and mileage and at the end of the period you hand the car back.
Where you gain, is that instead of funding the total cost of the vehicle, plus finance costs and fees, you are only paying for a proportion of the car and its costs and fees. So a car costing £20,000 with a residual value of £13,000 after three years, you pay for the £7,000 over that period. Whereas if you buy a car outright you are paying for the whole £20,000 over three years and then have the problem of depreciation and negative equity when you come to sell the car.
Car leasing is a more sensible finance deal and although you will not own the car after the period you are free to change your car for a brand new one without the penalties of depreciation and negative equity hanging over you.