Motoring: Money makes the wheels go round

You have found the car of your dreams, but how do you pay for it? John Blauth does the sums

THE EXPENSES of motoring can really hit hard. The hardest punch of all, though, is usually the cost buying a new car in the first place. Finding the necessary pounds 10,000 or more requires recourse to a money lender - usually a bank or finance house - who will want their money back, plus interest.

Again, there are three simple questions to consider before taking one of the many financing deals available: how much have you got available for the deposit for your new car and what is the part-exchange value of your car. Second, what is the monthly budget available out of your net income to meet the cost of your new car. And finally, how often would you like to change your new car.

Once these have been sorted out, there are two basic routes to follow: hire purchase of bank loan. The mechanics are similar for both: having chosen a car, you pay a deposit (normally 20%), make monthly payments to cover the outstanding balance over an agreed period and then the car is yours.

Before signing an agreement, however, you must shop around. If you know that the car you want to buy costs, say, pounds 15,000 and you have the pounds 3,000 deposit, ask your bank first for a loan proposal over two and three years, then ask your dealer for the same illustration. Make a note of the annual percentage rate (APR) which reflects the true cost of the borrowing and compare the two.

Then seek illustrations from at least three major finance houses and check their rates against the figures you already have. Check also whether the rate of interest is fixed or variable. If you feel that interest rates will fall, you may be better off with a variable rate but it is a gamble.

Hire purchase does mean that you may not sell the vehicle without paying off all the outstanding finance but at the end of the agreement, the car is yours outright.

If you are still unsure as to the best option for you, and outright purchase is not possible, then personal contract purchase (PCP) may be the correct option. PCP is similar in some ways to hire purchase but offers lower monthly payments and some degree of choice at the end of the contract.

Having chosen a new car and agreed the finance term (usually two or three years), a deposit of 10-35 per cent (depending on the scheme you are considering) is paid and an annual mileage limit is determined. Monthly payments are then made over the term, at the end of which you are faced with three choices.

First, you can use any extra value in the car you have been driving for the past two or three years as a part-exchange vehicle for a new car. Any money over and above the optional final payment which was declared at the start of the agreement can be put towards another new car.

The second option is for you to keep the car by paying the declared second- hand value and a small purchase fee. Your third and final option is to simply hand the car back to the dealer and, provided it is in good condition and you have not gone over the mileage limits, you will owe nothing.

PCPs are available from most dealers for most cars. Initially they can look expensive but that is because most of us just do not bother to work out how much a car costs to run.

An average family car in the Ford Escort, Vauxhall Astra, Peugeot 306 bracket run over a three year period, covering an average of 10,000 miles a year and including all fuel, depreciation, insurance, maintenance and servicing, plus the cost of the money used to buy the car in the first place will cost you around pounds 9,000. That is pounds 250 per month out of net income.

If just the use, not the ownership, of the car is important, then there is another option: the personal contract hire. This is a form of leasing, essentially long-term rental. With most manufacturers offering this option, the range of what the deal includes tends to differ only in minor detail but, essentially, a contract hire deal covers all maintenance, servicing and repairs and the road fund licence. It is fixed for a pre-determined period and assumes a maximum monthly mileage.

Some companies can include insurance as well but the key aspects of contract hire are that the capital outlay is usually just three month's rental and that subsequent rentals are paid monthly in advance.

At the end of the contract, provided the car is in good condition and any excess mileage charges have been settled, the car is handed back and you walk away with no further commitments.

PCP has the advantage of taking all the hassle out of motoring but you will have to pay for the convenience - and early termination can carry high penalties as initial depreciation on the car will have to be paid for.