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Money Matters: What You Need to Know About Car Financing

Photo by Grahame Jenkins on Unsplash

Money is the big deal breaker for most drivers, and when it becomes the biggest stumbling block between you and your next vehicle, your options can feel very limited. However, there are numerous ways to pay for your car that don’t involve blowout payments.

While almost every dealer, car broker or supermarket will offer you a finance deal, knowing the differences between each type of loan will ensure you choose the option that suits you best. So before you sign on the dotted line, let’s discover what you need to know about car financing:

There’s more to finance than dealership offers

Eye-catching billboards and awe-inspiring car ads may draw you in with their “low APR incentives,” “0% finance deals”, and “the car of your dreams from as little as…,” but there is more on offer in the world of car finance than what your dealership will lead you to believe.

Here we breakdown the most popular types of finance, so you can weigh up the pros and cons for yourself:

Personal Loan

One of the most cost-effective ways to fund your next set of wheels is by taking out an unsecured personal loan. While a lot depends on your credit history and the car you want to purchase, you’ll often find that you get the lowest interest rates with this kind of finance.

Things to bear in mind:

  • Most personal loans are capped at £25,000

  • “Unsecured” loan is borrowed from a lender, such as a bank until it is paid back in full

  • Personal loans are based on credit rating - without a good credit score, you may be excluded from better competitive rates

  • Can come with varying Annual Percentage Rate (APR)

However, personal loans stand out as a favourite amongst drivers. You own the car immediately and can sell it whenever you like. What’s more, unlike a personal contract purchase or hire purchase loan, you can use a personal loan to purchase a car from private sellers.

Personal Contract Purchase (PCP)

Personal Contract Purchase (PCP) has grown in popularity over the years. Part of the appeal is that you don’t make repayments on the car’s total value, which often means your monthly repayments are lower than other finance options.

Things to consider:

  • PCP deals are based on the guaranteed future value (GFV) of the car, leaving you with the option to purchase after you’ve made your final large “balloon payment” at the end of your agreed term

  • You can return the car and pay any outstanding charges

  • GFV is what the lender deems the vehicle to be worth at the end of its finance term, based on estimated mileage and age

  • Despite the fact you are the registered keeper of the vehicle, you won’t technically own it - PCP is a means of hiring, after all

  • Expect mileage constraints and extra fees if you break your allowance

Typically, PCP is offered for the purchase of brand new cars only, but some lenders will offer it depending on the age of the vehicle you wish to buy. What’s more, a PCP is secured against the car, so if you fail to repay your monthly instalments, your vehicle could be repossessed.

Hire Purchase (HP)

Like the title suggests, HP allows you to hire the car for an agreed amount of time by paying monthly instalments. Similar to PCP, you are the registered keeper of the vehicle, but you won’t own it outright until you’ve paid your final monthly instalment and the “option to purchase” fee.

With hire purchase, you can expect:

  • To put down a 10% deposit before paying off the remaining loan balance as a fixed monthly payment over a period of time

  • There are no mileage constraints, unlike PCP

  • No balloon payment at the end of your contract, so the car is yours without forking out a large sum of money

  • Monthly payments can be higher than other finance deals

  • Secured loan against the car, so your vehicle can be repossessed if you fall behind with your repayments

Personal Contract Hire (PCH) or Leasing

If you prefer a long-term rental to owning a car, then personal contract hire is the finance deal for you. Unlike PCP and HP finance, there is no option to purchase at the end of your lease. However, you’re expected to put down a large, non-returnable “initial rental,” which can be a sting to your bank balance.

Bear in mind:

  • MOT, insurance and tax can be included in your monthly repayments

  • No unexpected maintenance costs

  • Most flexible finance option as you don’t own the car - no worries over resale value and depreciation

  • You’re effectively paying to borrow the car, so if your ultimate goal is to own a vehicle, this isn’t the option for you

  • You’re tied into your contract until it ends

  • Strict annual mileage allowance

Cash payments are allowed

While paying out a large sum of money isn’t for everyone, if you can afford it, you can buy your car with no strings attached. No interest and no monthly payments to worry about.

However, there are a few things to note:

  • Fewer options available to you than finance

  • The car is yours outright, so you can sell it whenever you like

  • No interest to pay, which could cost you thousands of pounds

  • If your circumstances change, your car won’t be affected

  • Paying with cash means you may have to save for a while

  • Maintenance and servicing typically not included - that’s your responsibility to bear alone

Car financing has few limitations

Ok, so you’ve found the car you want, but there’s no other option for you than to apply for car finance. The catch? You’re not eligible, and you have been rejected.

Fortunately, there are specialist bad credit car finance lenders out there that focus on your individual circumstances and will tailor your loan to see you. So even if you have a poor credit history, are self-employed or have struggled to be accepted for a loan before, bad credit car finance may be the boost you need to rebuild your credit score.

Which type of car financing suits you best? With all the information at your fingertips and a host of lenders waiting to secure a deal, you’ll be behind the wheel of your new motor in no time!

This article does not necessarily reflect the opinions of the editors or the management of EconoTimes

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