Car Finance – The Low Down
There’s no doubt about it, buying a new car is fun. Whether you’re buying a sporty little number or a practical family run around, it’s likely you’ve spent a long time researching which car is best for you.
You’ve chosen your make and model, trim level and even your preferred colour. You’ve found the perfect example, taken it for a test drive and decided to take the plunge. But now comes the part which many of us don’t enjoy so much – paying for it. There are so many options out there to help finance your new set of wheels – how on earth do you decide the best one for you?
This simple guide will help you make the right choice for a car loan that suits you.
Personal Loan for a Car
Personal car loans are widely available and could be arranged through us today. You borrow a sum of money, which covers the whole, or part of the cost of the car.
- No need for a hefty deposit
- You own the car from the outset
- Fixed monthly payments
- You can choose a loan term (number of payments)to suit you
- If you already have the funds from the loan sitting in your bank account, you may be able to negotiate a better deal for your new car as a ‘cash buyer’.
- There may be a wait for the funds to appear (although some lenders make funds available almost immediately)
- People with black marks on their credit history will find the best advertised rates hard to come by
- Unlike dealer finance, it’s not just your car that will be at risk of repossession if you fall behind on payments – any of your assets could be up for grabs.
- You may have to pay a penalty if you want to repay the loan early
Hire Purchase (HP)
An HP is a bit like a mortgage – you pay an initial deposit and then pay the rest off over an agreed period (usually 18-60 months). Once you’ve made all of your payments, the car belongs to you.
- Quick and easy to arrange – often through the car dealer
- Flexible repayment terms – you can usually choose the deposit and the term (number of payments) to suit your needs. And if you’ve got a car to part-exchange, its value will count towards a deposit.
- Franchises often provide competitive rates on new cars via deals backed by the manufacturer
- You are more likely to be approved for a dealership finance deal than a low-rate personal loan if you have a low credit score, as the finance is secured against the car.
- You don’t own the car until the final payment is made. If you want to sell before then, you’ll need to repay the loan, as history checks will show the car has outstanding finance.
- If you fall behind on payments, the finance company could repossess the car
- HP tends to be more expensive for short term agreements
Personal Contract Purchase (PCP)
Similar to Hire Purchase, but slightly more complicated and only available from dealers. It works like this; you pay a deposit, then you pay monthly payments over a term. However, the monthly payments are lower than an HP and the term is usually shorter (typically two or three years), because you are not paying off the whole car. By the end of the term, there will be a portion of the finance unpaid – this is usually called a ‘GMFV’ (Guaranteed Minimum Future Value). The finance company guarantees that within certain conditions, the car will be worth at least as much as the remaining finance owed. You’re then left with three choices; you can return the car, pay a one-off payment to buy it, or trade it in for a new (or newer) car and start a new deal.
- Low deposit (usually 10%)
- Flexible repayment terms (from 12 – 48 months)
- Lower monthly payments
- A choice of what to do once you’ve reached the end of your agreement
- You don’t own the car and have to pay a final instalment before you can keep it
- Mileage and condition of the car affect the costs
- You may end up paying more in total than you would with a personal loan or hire purchase
- PCP can sometimes tie you into a cycle of changing your car every few years, to avoid a large payout at the end of the agreement (the GMFV)
You can pay the dealer a fixed monthly amount for the use of a car with servicing and maintenance included, as long as the mileage doesn’t exceed a specified limit. At the end of the agreement, you hand the car back.
- No worries about the car depreciating in value
- Flexible payment terms (from 12 to 36 months)
- Motoring at a fixed monthly cost
- You’ll need to pay a deposit (typically the equivalent to three month’s payments)
- Monthly costs are almost certainly going to be higher than a personal loan, HP agreement or PCP.
- Possible extra costs if you exceed the mileage limit
- The car never actually belongs to you
All things considered….
As you can see from the above, there are many options out there for you when it comes to financing your car and what is absolutely essential with any of them, is to read the fine print and consider it carefully before signing anything.
Don’t make the mistake of buying car finance then end up being unable to make their monthly payments. Your finance period may last for the next five years – so it’s critical that you carefully consider what may happen in your life over those next five years before deciding to commit to anything.
Understanding the various finance options being presented to you and being aware of the pros and cons, should steer you in the right direction to making informed decisions about your money.