What is Car Finance?
Car finance is a way of purchasing or acquiring a car, without having to pay the entire cost upfront.
Buying a car outright isn’t the best option for everyone, which is where car finance can help by spreading the cost of a vehicle over a set period of time instead of in one lump sum.
Each type type of finance works slightly differently, below we’ve outlined how they all work to help you decide which is the best option for you.
Ways to finance a car:
Personal Contract Purchase (PCP)
Personal Loans
Hire Purchase
Personal Contract Hire (PCH)
Personal Contract Purchase (PCP)
How it works:
You pay a deposit at the start of the agreement, a fixed monthly payment throughout the agreed term and then at the end of the agreement you have three options:
- Buy the vehicle (By paying the final balloon payment outlined in the agreement)
- Return the vehicle
- OR part-exchange the vehicle against your next car
Benefits:
- Flexible options at the end of the agreement
- No surprises - monthly payments & interest rate are fixed
Be aware of:
- Mileage charges - you’ll pay a fee (usually pence-per-mile based) if you exceed the amount in your agreement
- Damage charges - only applicable if you're handing the car back
- Owning the car - You won't own it until you make the final payment
Personal Loans
Not exclusively used for car finance, you can take out a personal loan from a third party and use that to pay the dealership for the vehicle.
How it works:
- Borrow a fixed amount
- Pay it back, with interest, in monthly instalments
- You own the car from the moment the dealer receives payment
Benefits:
- Own the car - from the moment the dealer receives payment
- Sell the car - at any time
Be aware of:
- These forms of loan can have higher interest rates than others
- The interest rate can reduce the more you're looking at borrowing
- You may be tempted to take out more money than you need
- In some cases the interest may be all forward loaded
Loan not secured against your car
It is important to keep in mind that this loan is not secured against the vehicle, such as with the other options on this list. What this means is that you can sell the car, without permission from your finance company, if this is something you want to do at any point. It works the same way as if you took out a personal loan to buy a TV essentially. You just need to make sure that the repayments are being kept up with if you do this.
Same monthly repayments
One of the biggest advantages of a personal loan is that the car can’t be repossessed at any time. As well as this, your monthly repayments are going to stay the same, meaning that you can budget better than you would be able to with a different type of finance. And finally, as you have already secured the finance, you are going to be in a better position to negotiate the price of the vehicle!
Poor Credit History?
But, on the other hand, if you have a poor credit history, then you are less likely to be accepted for a personal loan. You’ll also find that with some of the other options, thorough checks are carried out to ensure that the dealership can be trusted, but this won’t happen with a personal loan. So, you’ve got to do your own research and be sure they are a reputable dealer before you make a purchase.
Personal Contract Hire (PCH)
How it works:
- You pay an initial payment (also referred to as an 'Initial rental') at the start of the agreement
- Throughout the agreed term you pay a fixed monthly payment
- At the end of the agreement you give the car back & can either start a new agreement with a new car, or simply walk away.
Benefits:
- Fixed monthly payments
- Road tax - will be included for the duration of your agreement
- Resale values - as you never own the car, you won't have to worry about the resale value
Be aware of:
- Owning the car - this type of finance means you'll never own the car
- Mileage charges - if you go over the agreed amount
- Damage charges - when you hand the car back, the condition will be checked over
- Excessive early termination charges
Not bothered about owning your car?
If you never want to own the car, and you know this from the beginning, then you might want to consider personal contract hire instead of the other options we have talked about. If you’re not planning to buy the car at the end of a PCP, then PCH could turn out to be the cheaper option for you.
Mileage Restrictions
Once you have the car, you can use it as long as you are sticking to your agreed mileage. If you do happen to go over this, then you will be charged for as much as you go over. However, costs such as car tax are included, so you’re only going to have to pay for the fuel that you are using. Your contract should allow for fair wear and tear, but anything beyond this could mean that you face extra charges. To avoid this, just keep it in good condition and watch what you’re doing with it. Then, at the end of the agreement, you return the car. It really is as simple as that.
Check your contract carefully
Just make sure that you check your contract for the full list of terms and conditions. This way, you know what can induce more charges, what is expected from you, and the date that the car needs to be returned.
Not wanting to commit to one car?
A big advantage of this type of car finance is that if you are someone who doesn’t want to commit to a car, then this is perfect for you. You only have it for the duration of the contract, and then you give it back and move on. But, this can also be a disadvantage if you grow to like the car over the period, because you can’t keep it.
Hire Purchase (HP)
How it works:
- You pay a deposit at the start of the agreement
- Throughout the agreed term you pay a fixed monthly payment
- Once you've paid your final monthly payment you will own the car without any large payments at the end.
Benefits:
- Flexible - agreements can vary from one to five years
- Fixed monthly payments & interest rate - no surprises
- Own the car - once you've made all the payments
Be aware of:
- Payments - If you miss more than once payment, your vehicle could be repossessed
- Owning the car - You won't own it until you make the final payment
Simple Car Finance
A hire purchase is the simplest type of car finance that you can take out. To sum it up, you will pay a deposit, usually around 10%, and then you make fixed monthly payments over an agreed period of time. So, with hire purchase, the car isn’t going to be yours until after you have made the final payment.
Loan secured against your car
What this means, though, is that if you do miss a payment, you could face losing the car as the loan was originally secured against the vehicle. Also, the hire purchase agreements are set up by the dealer, but you can go to a broker to have this arranged if you would prefer. As such, if you’re going to be purchasing a used car, you want to look at what you’re going to be paying for this.
Fixed Monthly Amount
One of the best things about hire purchase is that you are paying a fixed amount monthly, so you know that the payments won’t increase or decrease. This gives you a level of security and allows you to budget it into your calculations without much hassle. You also have certain consumer rights here, which means that once you have paid a third of the total amount that you owe to the lender, they are not going to be able to repossess your vehicle without a court order. While this doesn’t mean that you should relax on making your payments, it does help give you that extra security.
You don't own the car straight away
The bad side of a hire purchase, though, is that you don’t own the car until the end of the agreed period. As such, you’ve got to be careful that all payments are being made on time. You also cannot sell the car if you want to. The loan was taken out against the car, and therefore you are going to have to complete the payments before you own the car, and can then sell it on.
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