Question: Why a buy a car when you can lease one?

Answer: Because it will cost you a lot more. Steve Fowler explains
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In a market where the sighting of a private buyer in a showroom is still an all too rare event, motor manufacturers have had to come up with innovative ways to turn money into cars.

Dealers will tell you that the most important consideration to new car buyers is how much they will have to fork out each month. With that in mind, the marketing and finance wizards have long had their work cut out to "make life easier'' for the car buyer.

On 1 August, the concept of personal leasing will take off in the UK when Ford launches its personal leasing plan through its dealership. Called Acumen, it promises to be a roaring success. Within 24 hours of its announcement, Ford's telephone hotline took 10,000 calls.

The move follows the Government's decision to abolish VAT on leasing charges in the last budget. Now the savings can be passed on to the consumer, making leasing schemes far more attractive to private car buyers. Unlike Ford's existing "Personal Contract Purchase'' scheme called Options, Acumen does not require a deposit. It is therefore likely to prove particularly attractive to hopeful car buyers with no initial funds.

Peugeot and Rover, among many others, are busy preparing their own personal leasing plans. Vauxhall, however, has countered with its 50:50 Offer. This lets you put down only 50% of the car's price before driving it away. There's no interest charge, and you pay the other 50% after two years - with the help of a Vauxhall finance package if you find it necessary.

So are any of these finance packages worth considering? They undoubtedly offer a great deal more choice and are likely to encourage more people to drive new cars. But if you want to own the car, it usually works out cheaper to use conventional finance.

Over the past few years, personal contract purchase schemes (PCPs) have become very much part of the salesman's patter and have been a tremendous success.

They work in a similar way to a normal hire-purchase arrangement. The difference is that you agree a minimum guaranteed future value (MGFV) for the car with the dealer. And because you only fund part of the overall price of the car, the monthly repayments are lower.

Like hire purchase, you pay a deposit. The deposit and the MGFV are then deducted from the selling price and interest is calculated on the remaining amount plus the MGFV (the amount borrowed). But the amount of extra credit you pay over Ford's conventional financing is more than pounds 500 for a pounds 7,000 car over two years.

At the end of the term, you have the option to pay the MGFV to own the car. Alternatively, assuming the car is in good condition, you can hand it back and even if it's worth less than the MGFV, you pay no more.

In some cases, the MGFV is set conservatively, so your car will actually be worth more when you return it. If you decide to buy another new car, the dealer will give you a generous part-exchange allowance for your current one. Once the MGFV is paid back to the finance company, any profit can be put towards a deposit on another PCP scheme.

However, the MGFV can vary quite dramatically. A higher MGFV means lower monthly payments. But you'll have to find more money to buy the car at the end of the term, and there's less chance of you having any profit to throw back into another scheme. Also, the MGFV will be taking a projected annual mileage into account. If you exceed the agreed mileage, you'll incur additional costs.

Ford's Options plan was launched three years ago and now accounts for 35% of all Ford's retail sales. The value of vehicles on the road financed through Options totals pounds 700m. Ford's credit arm now finances 51% of Ford's total retail sales, either through Options or hire purchase.

The success of Options has been the catalyst for other manufacturers and more than 25 of them offer their own PCP plans. Vauxhall has Choices 1-2-3, Rover has its Select scheme. In the search for original names, Peugeot has Passport, Toyota has Terms, Nissan has Preferences and Alfa Romeo, has the altogether more Italian similarity - Preferenza.

With Acumen, the personal leasing contract, the customer pays three monthly instalments at the start of the agreement and after a three month "payment holiday'', a further 21 instalments (in the case of a two-year agreement).

These include a monthly maintenance payment, so that all servicing and sundry items such as tyres, exhausts and brakes are covered by Ford - a shrewd way of protecting their investment.

It is similar to renting a television set. If anything goes wrong with it, you're covered. But the option to own isn't there.

Acumen's monthly payments are considerably higher than those of Options due to the lack of a deposit. And at the end of the term you can, again, hand the car back and walk away or, hopefully, continue with another PLP.

Ford has also extended its Options scheme to used cars under 26 months old and plans to take it even further. The long-term plan is, of course, that Ford Credit finances the purchase or lease of Ford cars from the moment they roll off the production line until they nudge the gates of the breaker's yard.


do ...

Your homework. Get your calculator out and look at all the options, including borrowing from other sources.

Work out a total overall cost for each option. Choose the one suiting your individual circumstances.

Indulge in that important practice of haggling. All finance schemes, no matter who runs them, are based around a final agreed price, not the list price, so there's still plenty of fun in buying a new car.

Be careful when agreeing a minimum guaranteed future value for a car under a personal contract scheme. The MGFV can vary quite dramatically. A higher MGFV means lower monthly payments. But you'll need more money to buy the car at the end of the term, and there's less chance of you having profit for another scheme.

Remember that the MGFV takes a projected annual mileage into account. If you exceed the agreed mileage, you will incur additional costs. Check for hidden purchase and return fees.

don't ...

Get rushed in to anything. It is easy when you have seen a car you like to be talked into a totally unsuitable deal. Car salesmen are trained to throw attractive-sounding figures at you, including the APR (annual per-centage rate) figures.

Be caught by different lenders using different methods of calculating the APR. Make sure you can compare the total cost of their loan. Some schemes are more competitive than others.

Buy without checking prices at other dealers. These can vary considerably, even within the same chain. Above all, remember the golden rule - always read the small print before signing the deal.

Ford Fiesta Azura 1.1 over 2 years 12,000 miles per annum

Ford Credit pounds Options pounds Acumen pounds

Est on the road price 6995 6995 6995

Deposit 2098 2098 -

Balance 4896 4896 -

Term (months) 24 25 24

Final purchase - 3067 -

Monthly payments 237 129 239

One-off admin fee 55 55 55

Total cost 7857 8326 5807

Options: Final payment (if you wish to acquire the car outright) depends on mileage

Acumen: Includes maintenance but not outright ownership

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