More drivers than ever are choosing car finance as a way to fund their next car purchase. But, if you’ve never taken out finance before or you’ve chosen the wrong agreement in the past, you may be wondering whether it’s the right option for you too. A car finance agreement can help you spread the cost of owning your next car, instead of having to put down a lump sum. The guide below looks at how car finance works and also the types of agreement you can choose from to decide whether it’s for you or not.
How does car finance work?
Car finance is when a lender gives you the money to buy a car and you then make repayments with interest back to the lender, to cover the cost. If you’re struggling to get the money together to buy a car outright, car finance is a great way to spread the cost into affordable monthly payments instead. There can be many cheap car finance deals with no deposit to pay upfront too or you can choose to put down some money at the start of the deal to help reduce the cost of the loan. Car finance payments will include interest unless you’ve opted for an interest free loan. Your interest rate will be set on an individual bases and there are a number of factors such as loan amount and credit score which can affect your payments. Car finance payments can be spread over a term that suits you but usually they are over a 3–5-year term.
Benefits of getting a car on finance:
It’s worth remembering that car finance is always subject to status, and you will need to meet the lenders criteria first before you can get approved for finance. However, if you do get a car on finance, there can be a number of benefits that you can enjoy.
- Get a newer, better car than you would when paying with cash alone.
- Spread the cost into affordable monthly payments.
- Choose a finance term that suits you.
- Multiple finance packages and agreements to choose from.
- No deposit needed upfront.
Types of car finance agreement to choose from:
In the UK, there are 3 main types of finance which tend to be the most popular. They are a personal loan, a personal contract purchase agreement and a hire purchase deal.
A personal loan can be one of the most cost effective of getting a car. A personal loan is when you borrow money from a lender to fund your car purchase. The money is deposited straight into your bank account if you’re accepted, and you can then buy the car you want from a dealer or private seller. Personal loans usually offer low APR car finance but can be hard to obtain if you’ve struggled with bad credit lately. You then make monthly payments till the end of an agreed term to cover the cost of the loan and any interest or additional fees too.
Hire purchase is a form of secured loan which means the lender borrows you the money to the value of the car you choose and instead of you buying the car outright with the money, the lender buys the car and is the legal owner until the end of the deal. You make monthly payments with interest to cover the cost of your chosen car until the end of the agreed term. Once all payments have been made on time and in full, there is a small option to purchase fee at the end of the agreement and then you will become the legal owner of the car. The car is then yours to keep with no more payments to make.
Personal contract purchase.
PCP deals are actually a form of hire purchase, but the structure of PCP is very different. Instead of spreading the cost of your chosen car into equal monthly payments. You instead make lower monthly payments and leave much of the value of the car until a final balloon payment at the end. PCP can offer more flexibility to drivers and at the end of the agreement, you have more choice. You can either pay off the large balloon payment and keep the car, use the value of the loan towards another car on PCP and trade your current car in or simply hand the car back to the dealer.