Car Finance Explained
With so many types of finance available, it is easy to get confused as to what the best option is for you. Should you go with a hire purchase or a personal contract purchase? Or, in fact, would a personal loan or guarantor loan be more appropriate?
Here is a quick guide to help you tounderstand the different types of car finance available ...
What is car finance?
Car finance is when you use a loan to buy a vehicle and then repay it back, together with any interest and fees, over an agreed number of months or years. In most cases, the lender still owns the vehicle until you have paid offthe balance of your finance agreement with them.
Personal Contract Purchase (PCP)
With PCP agreements, you willtypically pay a deposit andfixed monthly payments for anagreed period - usually 36 or 48 months. At the end of this term you either return the vehicle to the dealer, or, if you wish to keep the car, make a final, one-off payment (often known as the Guaranteed Minimum Future Value or 'balloon' payment).
Benefits of PCP
PCP may be suitable for you if you are buying a new or nearly new car. It gives you flexibility in that at the end of the term, you can pay for the car outright and own it. Alternatively, you can give it back, with no money to pay.
Many people like the flexibility offered by PCP, as it means they can change their vehicle on a more regular basis.
And because you are not paying outright for the vehicle initially (this happens with the balloon payment at the end of the term if you decide to keep the car), the monthly repayments can work out lower than some other methods of finance.
What you need to know about PCP
If you go down the PCP route, and want to keep the vehicle, you need to remember that you will not own it until you have made the final ' lump sum' balloon payment.
When you initially sign the PCP agreement, the balloon (or Guaranteed Minimum Future Value) payment amount will be provided. This amount will typically be in the ' 0000's, so you may need to arrange alternative finance - unless you have saved the money and have it to hand.
If you decide you don't want to keep the car at the end of the term, you should note that typically, you will be charged for any excess mileage(above the agreed amount), as well as any damage (such as scratches).
Hire Purchase (HP)
A Hire Purchase agreement is a way to spread the cost of buying a new or used car by paying a deposit (typically optional) before paying off the balance of the loanin regular, monthly instalments over a set period of time.
Benefits of HP
HP agreements typically offer lower interest rates than some other forms of car finance and are regularly accessible for people with less than perfect credit histories, which explains whythis option is the most commonly used form of car finance.
At the end of the agreement (which can run from 1 - 5 years), and once all payments have been made, you own the car.
Unlike with PCP deals, there are no mileage restrictions.
What you need to know about HP
While HP is among the cheaper car finance options, it can work out more expensive if you opt for a shorter term agreement.
You do not own the car until all the repayments have been made. This means that itcan be repossessed if you don't meet your regular monthly payments.
Personal loans can be used for anything - including buying a car.
Benefits of a personal loan
A personal loan is not secured against the vehicle, so, if you wish, you can sell it at any time. Of course, you will still need to keep up with your monthly loan repayments even if you sell the car.
What you need to know about a personal loan
Personal loans tend to be offered to people with good or excellent credit histories. So if you have a poor or bad credit history, you may get refused this type of lending.
There is typically also a limit to how much you will be able to borrow - maximum loan values up to £25,000 are not uncommon.
A guarantor loan is where another individual (such asclose relative or friend) agrees to guarantee the monthly car finance repayments in the event that you fail to maintainthem.
Benefits of a guarantor loan
This type of lending is popular withpeople who have experienced difficulties in getting approved for finance elsewhere.
If you get approved for a guarantor loan, this can also help rebuild your credit rating - as long as you keep up to date with the repayments.
What you need to know about guarantor loans
Guarantor loans typically may cost more than other forms of car finance. You will need to have someone who is happy to act as a guarantor and in most cases, they will need to own their own home.
Four things to take away from this guide
Hopefully this brief overview of the different car finance options available should help you understand your options. Finally, remember that:
- You must becompletely sureyou canrealistically afford the loan repayments before signingan agreement.
- No matter what type of car finance you opt for, if you do not maintain the loan repayments, your credit history will be affected.
- Should things change during the period of a car finance agreement or you simply want a change of vehicle, in most cases you can part-exchange it. The dealership typically takes over responsibility for the outstanding finance (the equivalent amount may then be included in the cost of your new vehicle).
- You can settle any agreement early. This may attracta small administrationfee, typically one month's interest or a fee for an option to purchase. These costs will be detailed in your original loan agreement.