How to buy a car in the UK - What is the NHS fleet?
Introduction
Buying my car was a very stressful process. This is a sentiment shared with a lot of my colleagues who have gone through the process. This ultimate car-buying guide will take you through what you need to know before committing to a car. It is a guide anyone about to buy a car will be happy they read. As I work in the NHS and have lived in the United Kingdom for just under three years, my description is going to be through this lens.
At the end of the article, I will talk about the NHS fleet, a tax-efficient way of driving a new car as an NHS staff on a fixed-term contract. Purchasing a car is a very dynamic process and varies from person to person as our preferences are very different. This is written as a general guide and will not substitute individual research after considering your financial circumstances and risk appetite. The article is not financial advice and is only for information purposes.
Car Financing Options
You have passed your driving test and need to buy a car. You go to Auto-trader and see the car you love, but you can not afford it. You now have to make a reasonable financial plan for a car within your affordability. The list below are the various financial options you have to get a car. Starting from the most cost-effective, they include:
Cash Purchase
Depending on how much you are willing to spend, you could either buy the car with your savings (low-cost cash outright buy) and not pay any interest or get a loan from the bank where you pay some interest on the amount (cash outright buy with loan from the bank)
Low-cost cash outright buy
This would usually get you older, high-mileage cars. This is the most cost-effective of all methods and gives you the most cost savings. Especially if you don’t mind an older car. The downside to this is that you can be quite unlucky and spend a lot of time at the mechanic. A good number of people who have done this have not had any major issues with their car, but you have to be open to the possibility of things not going so well with it. We will explore ways to mitigate this at the end of the article. The budget for this would be between 2000 to 4000 pounds for a manual car and 3000 to 8000 pounds for an automatic car depending on your taste.
Cash outright buy with a loan from the bank
If you do not want to spend your saved cash on buying a car, you could get a loan from the bank to buy the car outright. You could get a really decent car of about three to five years old and avoid the risk exposure from buying a low-cost/high-mileage car. The cost of these cars would vary from 5000 pounds to as high as you can afford to borrow. Your credit rating and length of time in the country will determine the interest you get on these cars. The car is entirely yours on purchase.
This links to a checklist of things further down in this post to reduce your risk when buying a used car.
Finance the car:
This is a popular method of getting a car from approved dealerships and paying for it over some time with interest. The two common types are hire purchase and personal contract purchase, with the latter being very popular.
Hire Purchase (HP):
This is similar to getting a loan from the bank, but you will be getting this loan from the car dealership’s credit agents and they would need you to pay a deposit upfront and spread out monthly payments over three to five years at an agreed interest rate. This is an option to explore if you are unable to get a loan from your bank for various reasons. This can get you really good cars at any cost from as low as 5000 pounds to as high as possible - depending on how much you can afford monthly. At the end of the deal, the car becomes yours. A lot of people do not do this because of how expensive the monthly payment can be compared to personal contract purchases, which will be discussed next.
Personal Contract Purchase (PCP):
This is like a hire purchase, however, the monthly payment is significantly less. In HP, the payment is divided into two parts- the deposit and the monthly repayment. The monthly repayment amount is spread throughout the contract term. At the end of which you would have fully repaid the car and have full ownership of the car similar to a loan from the bank. In PCP, however, the payment is divided into three parts: the deposit, the monthly repayment, and the guaranteed future value (GFV) payment. From the total price of the vehicle, a projected price of the car (GFV) is made at the beginning of the contract. This projected future price(GFV) is subtracted from the current price and then you repay the difference during the contract term. To make it easier to understand, let’s assume you want to finance a 15,000-pound car using PCP over three years. The dealership projects that the car would be worth 5000 pounds at the end of the contract. This 5000 pounds is the GFV. You get to pay only 10000 pounds over the three years. The sum of your deposit and monthly repayments will amount to 10000 pounds. Compare this with someone who has to pay 15000 pounds over three years in an HP contract. This comes to 277 pounds in PCP versus 416 pounds per month in HP.
What happens at the end of PCP:
At the end of the contract, the car is not yours and you have to settle the GFV. In our example above, the GFV is 5000 pounds. The options will include
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Paying the 5000 pounds outright and the car becomes yours,
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Financing the 5000 pounds and paying over a period with interest, with the car becoming yours when you complete the payment,
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Returning the car to the dealership and,
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Return the car and pick up another car from the same dealership and if you have positive equity (that is the actual price of the car in the market is more than the projected guaranteed future value -GFV), you can use this extra money towards the deposit for another car.
Most people favour the last option. However, if in negative equity (that is, the projected GFV is higher than the actual market price) the most reasonable thing is to return the car and walk away, except you are attached to the car.
Why is PCP popular?
PCP is the most popular finance method, for obvious reasons of low-cost monthly payments, driving a clean reliable car, and flexibility at the end of the period. The downside is that you do not own the car and have to keep it in a condition required by the dealer and usually have a pre-agreed yearly mileage restriction.
This article on Money Supermarket does an excellent job comparing PCP vs HP.
Moneysupermarket
Leasing the Car
This is a cheap way of driving a new car and involves renting the car like you would rent a property and you don’t own the car or have any claims to it at the end of the tenure. Most leases do not give you any option to own the car, but some eg- NHS fleet may be open to the idea. A lot of lease companies exist and few companies provide company cars to staff on lease. However, I will be talking about the NHS fleet salary sacrifice lease scheme as this is the one I am familiar with.
The NHS fleet:
The NHS fleet is a car lease salary sacrifice scheme that provides competitively priced cars for a duration of two to three years for people with an NHS fixed-term contract. In my opinion, if you are a new driver in the UK and want to drive a new car for cheap, without having to worry about the expensive new driver insurance and maintenance costs, it is a competitive deal to strongly consider when you start your research. You usually need to have a contract for at least three years with your NHS trust to be able to access vehicles on the NHS fleet.
The button below will take you to the NHS fleet site.
There are many cars on the NHS fleet, with a lot of electric options. If you live in a house with a driveway and have permission to install a wall charger to charge at home, you will make significant savings on fuel costs if you get an electric car on the NHS fleet. You should read the extensive document on the NHS fleet website to see if it is right for your circumstances. It is a salary sacrifice scheme with a few things to note before signing the contract. You need to be on the NHS pension to access the NHS fleet options.
Advantages of the NHS fleet:
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You do not have to pay a deposit as with most finance options
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You get the car for a competitive monthly cost
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You get to drive a new car, usually less than two years old.
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You are insured for free on the car along with four additional drivers (this could save you up to 2000 pounds in insurance)
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You do not pay road tax
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You do not pay for car servicing or MOT.
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You save on income tax
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You reduce your pension contribution if you are on a trajectory to exceed the lifetime pension allowance on retirement
Disadvantages of the NHS fleet:
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Your monthly earnings drop proportionally.
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You do not own the car at the end of the term.
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You have a mileage restriction - which you choose when you apply and this affects your monthly payment.
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It can take a long time for the vehicle to get to you, especially if custom-made for you. To navigate this, search the in-stock vehicles/special offers section as the cars in this selection will get to you faster than getting a bespoke vehicle. You can get these cars within 2 to 4 weeks. If custom-made, it can take three to six months to arrive.
NHS Fleet Effect on Mortgage, Maternity Pay, and Pension
As a salary sacrifice scheme, the NHS fleet scheme affects some benefits as well as your mortgage borrowing power described below.
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Your mortgage borrowing power decreases; If you need to get a mortgage whilst on the NHS fleet salary sacrifice scheme, the maximum property value you can get drops proportionally. If you earn 40,000 pounds annually, normally, you would be able to borrow a maximum of 180,000 pounds (40,000 pounds * 4.5) for your mortgage. If your NHS fleet car costs 5000 pounds per year, this drops your annual gross income to 35,000 pounds per year, and your maximum mortgage borrowing drops to 157,500 pounds (35,000 pounds x 4.5).
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Statutory maternity pay (SMP) is reduced: if you were on the scheme in the weeks of your qualifying period. As the SMP is calculated based on your average weekly earnings six weeks before you go on maternity leave, a salary sacrifice like this will drop your average weekly earnings and corresponding SMP. Do the calculation and make sure it is right for you before deciding.
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Your pension contribution is reduced: As your gross income reduces, your pension contribution drops as does your employer-matched contribution. This will be an advantage if you are trying to avoid breaching the lifetime allowance.
To read more extensively on the NHS fleet scheme, have a look at their brochure by clicking the button below.
Other things to consider when buying a used car
There are many reasons a person will want to sell their car, and it is a risky market for a car buyer in the UK. So you need to be meticulous in screening used cars.
Top tips include:
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Review the MOT history of the vehicle- you can do that for free here. All you need is the car registration number.
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Ask why they are selling and review the number of previous owners of the car. The lower the better, however, this is not hard and fast.
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Have a checklist of things you must look for when inspecting the car before committing. Identifying these issues will give you a strong footing to bargain from.
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Make sure you go with a friend who has some driving experience and is preferably more knowledgeable about cars than you for the car inspection. If you do not have driving friends, you could go with anyone. An extra pair of eyes is always good.
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Run a car history check online- looking for true mileage, previous keepers, if any outstanding finance, or if it has been involved in an accident. This cost about four pounds to do. You can use the Total Car Check website for this.
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If the seller is willing and you want to be more meticulous, you can arrange to take the car to a nearby mechanic/book in with Halfords for a more comprehensive check.
Bookmark this extensive RAC guide as it contains everything you need to check before buying a used car.
You do not have to do these, a few people I know have bought a used car online without seeing the car and have not had any bad experience. But if you do find something significant whilst doing this, you will be more than grateful you did.
I wish you the best in your car-buying journey!
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