When it comes to getting a car on finance, you may think it’s a one size fits all agreement. However, there are a few types of car finance agreements which tend to be the most popular and you may be better suited to one over others. The guide below has been designed to explore different types of car finance available and how financing a car works.
How does car finance work?
Car finance is a smart way to help spread the cost of your next vehicle. Through car finance you can choose your loan term and select your monthly budget to get the car you want! Car finance can be offered by car dealers, finance lenders or through car finance brokers. You will usually make car finance payments over 1-5 years and will pay for the loan in fixed monthly payments till the end of your chosen term. Car ownership and what happens at the end of your agreement can depend on which type of loan you choose. Let’s take a look at the most popular type of car finance agreement available in the UK and if it could be the right one for you!
Hire purchase car finance
Hire purchase is one of the most straightforward types of car finance and is a popular way to buy a used car. Within a hire purchase agreement, you spread the cost of your chosen vehicles over a term that suits you. You can choose how much of a deposit you put down but within HP, the more you put down, the lower your monthly payments can be. Monthly payments and added interest must then be paid back each month on time and in full. During a hire purchase agreement, the lender owns the car until the final payment has been made. Ownership will be transferred if you choose to pay the small option to purchase fee. If you want to settle your finance deal early, you can do this by obtaining a settlement figure from your lender.
Personal Contract Purchase
Personal Contract Purchase (PCP) is a flexible way to pay for your next car. Monthly payments on PCP deals tend to be lower than other options because you don’t spread the cost of your vehicle. Instead, you pay off the value the car loses whilst you own it, also known as the depreciation. At the end of the agreement, you can choose to hand the car back to the dealer, use the value towards another PCP deal or pay the balloon payment and keep the vehicle. The final balloon payment tends to be quite high so many people choose to refinance a balloon payment or simply hand the car back to the dealer. You will also need to set an agreed mileage limit at the start of the agreement and also keep the car in good condition throughout the term.
Personal loans can be used to purchase anything you want and can be one of the most cost-effective ways to get a car. However, if you have a low credit score you may struggle to get approved as the best personal loan rates can be reserved for those with good credit. When you apply for a personal loan, you will need to know how much you want to borrow. If accepted, your chosen amount will be deposited into your bank account which you can use to purchase the car you want. You will then make monthly payments to the agreed term with a fixed interest rate. You have the freedom to buy from a private seller or car dealership and will be the automatic owner of the vehicle. Personal loans are unsecured which means you don’t have to use an asset such as the car to secure the deal.