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Car Finance Explained: The Complete Guide

18 Jul 2018

British UK Car Finance

Many of us are finding that we will have to purchase our cars through some form of car finance. Over a million cars were purchased on finance between 2016 and 2017, according to industry figures. Nobody has the funds to be able to pay for a car outright anymore and finance can be found in many forms. Manufacturer franchises, car supermarkets, online retailers and even small used car dealers are able to offer some form of car finance.

If you are new to car finance, the options available to you might seem overwhelming and you may ask yourself where you should even begin. Our detailed guide on car finance is easy to understand and will teach you everything you need to know about the finance options available to you. Once you are equipped with this information, you should be able to work out which finance deal is the right one for you.

Car Finance Explained

Credit scores and car finance

If you decide to not buy your car with cash, you are more than likely to purchase your car through finance or credit. By using credit, you are going to be able to get better deals if you have a good credit score compared to if you have a bad credit score. Although, remember that just because you have a good credit score, it doesn’t mean you will be able to afford any amount that you want to borrow. It is imperative to work out all of your incomings and outgoings before deciding how much to borrow through credit.

Personal loan

If you decide to purchase a car through a bank or building society, you are able to spread the cost of the purchase of buying the car between one and seven years. If you haven’t managed to save up enough money, personal loans are one of the cheapest ways to borrow money long term. One of the main problems you may find is that the amount of the monthly repayments can be higher than other options available to you, but it also allows you to own the car right from the start of your loan and the total amount you pay back overall can end up being less than some other methods.

Hire purchase

Hire purchase car finance explained in simple terms allows you to pay a deposit of around 10% and then lets you pay the rest back through a fixed amount of monthly payments over an agreed period. One of the biggest differences between this type of car finance and getting a personal loan is that you will not own the car until you have made the final payment. Hire purchase agreements are set up by car dealers and brokers and the rates are best for brand new cars. You also have certain rights with this type of agreement, which allows you to return the car if you have paid half of the cost and you will not have to make any more payments. You should check the contract to see if this applies to you.

Personal contract purchase

A personal contract purchase is quite similar to a hire-purchase agreement as you will pay an initial deposit, followed by monthly instalments. A PCP is different from other types of car finance because your monthly instalments are paying off the depreciation of the car, and not its entire value, over the course of the term. Then, at the end of the agreement, there will be one final balloon payment that has to be made if you want to own the car outright. Other options you have will be to return the car or use the resale value towards buying a new car.

Personal contract hire

Personal contract hire is a type of long-term rental that will work for you if you are not looking to purchase the car at the end of the agreed contract term and you won’t need to change the car before the end of the contract. You will be able to lease the car for an agreed period of time by making fixed monthly payments. Then, once the contract ends, you will simply be able to return the car. Although, before you are allowed to get a car through PCH, you will need to pass a credit check and pay a few months’ lease upfront or you can be refused car finance. It’s imperative that you have sat down and thought about all of your outgoings before you sign a contract and you are absolutely certain that you’ll be able to meet the repayments for the full length of the contract.

Credit card purchase

As long as your car is over £100 and less than £30,000, you will be able to get extra protection on the full purchase cost of a car if you use a credit card to pay all, or part, of your car’s purchase price. That means you could pay a small deposit of £20 on a car worth £5,000, pay the rest using a debit card, and still have credit card payment protection. You just have to make sure you meet all of your monthly payments in full and on time!

Peer-to-peer loan

This is borrowing and lending between individuals through websites such as Zopa. Somebody who needs to borrow money goes to a company like Zopa and applies for credit. Once approved, the borrower is allocated in to a risk category, which determines the interest rate of the loan you get. Then, that loan is funded by an individual investor who acts as the lender. Although peer-to-peer loans bypass traditional financial institutions such as banks or building societies, you still need a good credit score to get the best rate.

Other options

Paying with cash

Paying with cash can often be the best option when it comes to buying a car compared to buying it with finance. As long as you can pay for other major costs in your life or can prepare for any unexpected future costs, then paying with cash is more than likely going to be the cheapest way to buy a car. The main reason why buying a car with cash is so cheap is because buying a car with cash means that you own it straight away, so if you end up having some form of financial difficulties, you can sell it as soon as possible to get some money.

What to remember

Car finance is a popular option when it comes to purchasing a car and it looks like its popularity is only likely to increase, Santander UK’s car finance lending totalled £940m in the first quarter of 2018, up 8.3% year-on-year. There are many options to choose from when deciding about how to purchase a car. The best thing you can do to make sure you choose the right option for you is simple — lots of research. Make sure you know what you can afford before you choose a car finance route to go down as once a contract is signed, they will be hard to get out of unless stated in the contract itself. It is also important to remember that if you are thinking of selling your car before getting a car on finance, make sure you get as much as you can for it, whether you’re part-exchanging at the dealership or selling privately as you will then be able to pay a larger deposit on the new car you wish to get finance for.

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