Buying a car is a serious business. After housing, it is the biggest expense that most of us have. So, choosing the right car for you and financing it in a way that makes sense is important.
In the past, if you wanted to buy a car you would have had to save up for it and pay cash, or look into car loans. Today, you have a few more choices.
Below, we look at the most easily available options. Highlighting the pros and cons of each of them. Of course, because we are not financial advisors, this is not a comprehensive comparison of the options. But it is designed to be enough to allow you to understand which car finance options to investigate first.
Hire Purchase (HP)
This is the oldest and therefore best-understood way to borrow money to buy a car. You borrow the money you need to buy the car from a financial institution. Then, use that to pay the car dealer outright.
You do not own the car until the final payment is made. Until that point, the financial institution you borrowed the cash from owns it. Although with each payment your ownership grows. But because you are not the full owner you cannot sell or modify the car until the final payment is made
If you miss payments, the finance company will repossess the car and sell it to cover your debt. Because of the way new cars depreciate there is a possibility that what the vehicle is sold for will not raise enough to completely pay off the loan. In that situation, you will receive a bill for the difference.
HP agreements are not the right choice for everyone. You are usually required to pay a deposit which is typically quite a high percentage of the purchase price. In addition, in many cases, the amount you pay in interest is higher than it is for a PCP.
Personal Contract Purchase (PCP) car finance
With a PCP you also do not own the car and if you do not make the payments, you also risk the vehicle being taken off of you. However, things are quite different from a hire purchase deal once the final payment. Then, you have 3 options to choose between :
- Make a balloon payment which enables you to own the car outright.
- Hand it back to the lender, which means you have effectively been leasing it from them. In this situation, you pay nothing further. Unless you have exceeded the pre-agreed mileage restriction or not kept the car in good condition. In that situation, you will be charged an extra fee.
- Negotiate another deal with the provider. For example, turn the GMFV (guaranteed minimum future value) into a new PCP agreement and use that to have access to a different car.
Other less common forms of car financing
Those are the two most common car financing options, but there are others. These are packages that are designed to meet the needs of people in unusual circumstances. They are:
- Bad credit vehicle financing – people with poor credit scores can now use financing to buy a car. However, the choice of companies is limited, and interest rates tend to be high.
- Guarantor car financing – this form of financing involves someone who has a good credit rating acting as a guarantor.
- No deposit vehicle financing – most of the time the buyer is required to put down a substantial deposit when using car financing. However, a few companies now offer no-deposit deals.
- Low APR deals – for those who can put down a big deposit or who have an excellent credit score, low APR deals may be an option.
- Car financing for benefit claimants – many people assume that because they are on benefits they cannot secure a car loan. In the past that would have been true, but that is no longer the case, but often you will need a guarantor and the interest rates can be high.
Armed with the above information, you should now be able to identify which type of finance is likely to work for your situation. Now, you just need to pick one or two, double-check the small print, get a few quotes, and buy your car.
