Special Report on the Motor Show (7): The best financial deals for your wheels: Money talks, but HP or a personal leasing contract may be better than a bank loan, writes Anthony Lewis

BANK loans are an expensive way of buying a new car, yet people trust their bank to give them a good deal and won't trust car dealers.

Simon Page, leasing and finance manager at VW-Audi, says of car buyers being offered finance by a dealer: 'The view of many is, 'He's not a money specialist so there must be some hidden mark-up.' '

Buying the car and arranging finance at a competitive rate in one place is still alien in Britain. 'We go to a bank to borrow money and a car dealer for the car. As an industry we've got a lot of work to do,' says Mr Page.

'People won't change unless we offer varied and innovative products. The rates you can get through a dealer are far superior to anything you can get from a bank.'

Most people buy a new car on some type of hire purchase. As a financing medium it has been around for almost 50 years and we feel comfortable with it, says Peter de Rousset Hall, of Ford Credit.

But there is a small shift away from HP towards what is variously described as personal contract or personal leasing, which at present accounts for about 5 per cent of new car buying. It is very popular in the United States, where nearly all new cars are bought under personal contract.

But Mr Page says it is a much more complex way of buying a car than HP.

Over the last couple of years all the leading car manufacturers have launched personal leasing schemes. Ford's Options, Vauxhall's Choices, Rover's Select and VW-Audi's Private Contract are personal contract schemes. Peugeot is monitoring their progress before deciding whether to do something similar.

These are all aimed at the individual rather than fleet user, but the terms are similar to those of fleet leasing or contract hire in that the user does not actually own the car, and also lay down certain terms of use, the most important of which is mileage. Most deals are over two years, with a maximum 12,000 miles a year.

The aim is to give low-cost, fixed-price motoring. The user pays a monthly sum that covers only the depreciation of the car and interest. A value is placed on the car at the end of the contract period and it is the difference between that and the purchase price which is being paid off. This is why a company such as Mercedes-Benz - whose secondhand values are recognised as among the best in the business - can make out a case for being as affordable as a Ford, Vauxhall or Rover.

Although a 1.8 litre Mercedes-Benz 190E costs pounds 16,745 new, it is still worth an estimated pounds 11,230 after two years and 24,000 miles, so that the user is paying off only pounds 5,515 at pounds 235 a month.

Mercedes-Benz Finance puts the depreciation at 33 per cent - while Ford, Vauxhall and Rover quote depreciation levels of between 55 and 64 per cent. Buy a pounds 10,000 Ford and it will be worth pounds 4,000 after two years and the user will have had to pay out for pounds 6,000.

With any of these schemes, the customer has nothing to put down on his next car, because all he or she has done is pay off interest and depreciation - unless the car is worth more than the previously agreed 'minimum guaranteed future value'.

But, as Mr Page points out, VAG's Private Contract can incorporate all maintenance charges, including replacing tyres, and a substitute vehicle if your own car should be off the road.

The first customers to take up Ford's Options, introduced two years ago, are now coming to the end of their deals. 'We're pleased with what's happening at the end of the contracts. Customers are renewing,' says Mr de Rousset Hall.

However, John Brown, a director with NWS Bank, one of the country's biggest finance companies, believes that personal leasing is more talked about than actually done.

'A lot of people are suggesting it will come,' he says, pointing out that actual leasing schemes are tax-driven. Business customers are taking them up as an alternative to a company-provided car, perhaps funding it with their employer's cash alternative.

Neil Tomkin, motor marketing director with Lombard North Central, says: 'It's early days yet. Leasing is a huge success in the US, where the credit concept is far more sophisticated than in this country. Whether we will adopt the 'lease, don't own' culture of the States is hard to forecast.'

Despite the high profile that personal contract schemes have, hire purchase is still used for at least 50 per cent of car purchases in Britain. It is the ideal financial method for people who want to own the car they are paying for.

But many people still think that if they go to their car dealer as a cash customer, having arranged their finance elsewhere, then they will be able to haggle to get a better deal. And that, says Mr Tomkin, is not really true.

'A building society loan is going to work out at around 23 per cent. A hire purchase deal done through a dealer backed by a finance house can work out at between 16 and 22 per cent, depending on the size of the loan and how much deposit you put down and the repayment time.'

The most common HP deal involves a 20 per cent deposit and a three-year repayment. The reason that finance houses can offer better value than pre-arranged loans is that finance houses keep a stake in what is bought until the last payment, says Mr Tomkin.

Another advantage is that since they specialise in motor finance and are represented inside the dealerships, finance houses have much closer contact than a bank or building society, whose loan might be used for anything from a boat to a new kitchen or exotic holiday.

It pays to shop around and if one of the cars on your short-list is under offer on low-cost finance, then go for it. Low-cost finance is where the manufacturer is sponsoring or subsidising the deal, and the results can often be spectacular.

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