Car Finance: A Guide

In this day and age, you are very lucky if you are able to purchase a car outright when looking for a new vehicle. For the majority of us, we will enter a car dealership knowing that we will have to come to some arrangement regarding car finance.

Borrowing money to pay for a new or used car can sound quite daunting, but car finance is designed to make the purchasing process as easy and as manageable as possible by splitting the payments up over 12 months or more. The biggest question when it comes to car finance is: Which finance package is best for me?

Personal loan

This is a very popular choice when it comes to car finance, as it is relatively straightforward, as long as you have a positive credit background. Many companies can offer you personal loans when it comes to car finance, which include banks and online lenders.

A personal loan has the main benefit of not having to place a deposit on your chosen car and instead you pay the dealer the full amount after attaining the loan, then pay back the lender over a set number of months. When considering a personal loan, take a good look at the interest rates that will apply to your repayments; this interest will place a cost upon your loan payments for each year you’re paying the money back – obviously the lower this rate is, the less the cost is.

Another important factor is whether you get an unsecured or a secured loan. Most will go for the unsecured loan as it is only tested against your credit rating, whilst a secured loan requires some sort of collateral which is usually your house.

Hire purchase

Usually referred to as HP or leasing, this form of car finance is a quick way to get credit for your new vehicle when going through certain dealerships. With HP, you will almost always require a deposit, which is usually about 10 per cent of the car’s value, but if you are part exchanging your old car, then this can be used to cover the deposit cost if the vehicle is worth enough.

There is less risk involved when it comes to HP, as credit is secured only against the car, which when paying through HP, you won’t own until the final payment is made. However, a rate of interest still applies, and you will find that this rate will be higher on used cars compared to new vehicles as these will not be backed by the manufacturer.

You will pay off the car, less the deposit, over a set number of months; the more months you pay it off the lower the payments are, but you will incur more interest costs.

Personal contract plan

A personal contract plan – or PCP – is very similar to HP in that you place a deposit and pay the invoice value back over several months then pay the rest in a final lump sum. However, the difference with PCP is that the final payment is completely optional to you as a customer.

If you don’t want to keep the car come the end of the agreement, you can not pay the final payment and either hand the car back to the dealer or trade it in for a new model and start the cycle from the beginning, but with a brand new car. It is a great method of paying for a car if you’re after flexibility because you know you’ll want a new car every three years, plus the process means monthly payments are low, depreciation doesn’t enter the frame and the bulk of the cost comes with the optional final payment at the end of the agreement.

One downside to PCP, however, is that you have to stick to a restricted yearly mileage set at the beginning of the deal. Extra costs will be incurred if you go over the agreed amount, usually at a certain price per additional mile.

So there you have it, now all you have to decide is which is the best car finance package for you.

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