TYPES OF CAR FINANCE: Definitive Guide

You’re looking for a new automobile and have a specific budget in mind, but aren’t sure how to pay for it. You may be able to get car financing to help you out. Purchasing is among the few big purchases you’ll undertake in your lifetime. Therefore, it’s critical to do it right the first time. While car purchasing can be a wonderful experience, you must also be practical and realistic concerning what you can finance. This is where different types of car finance come into play. Car financing is a method of spreading the expense of a car over months or years.

We’ve put together this piece to explain everything you need to know about the wonderful world of car finance and the various types.

What Is Car Finance?

The word “car finance” refers to the method of paying for an automobile over a predetermined length of time rather than paying cash for it instantly.

Although other choices are available. The most frequent types of car finance agreements include hiring purchase, personal contract purchase (PCP), lease purchase, or personal loan.

The payments you make during this time will be determined by several criteria, including the amount you want to loan. The duration you plan to keep your automobile, and, eventually, the sort of agreement you have.

With so many choices, it’s critical to understand how they operate and why one could be better for you than others.

Different Types Of Car Finance

Buying an automobile, whether new or secondhand, is a major investment. Of course, if you’re fortunate enough to have the finances, you may buy your next automobile entirely. However, the majority of individuals must rely on a financing option.

However, there are various types of car finance available to you to choose from. They include:

#1. Personal Loan

A personal loan could provide you with enough funds to purchase a vehicle outright. The loan will then be repaid over a specified period, typically at a reasonable interest rate.

A personal loan has the luxury of being unprotected. Simply put, this means you don’t have to put up any collateral (like your car or home). If you don’t pay back the loan, the lender can sell your security to recoup their losses. Because an unsecured loan carries a lower risk for you but a greater risk for the borrower. Thus, to get authorization, you may need an excellent credit score.

Requesting for a loan protected against your car can make it much easier to be approved or get a good offer. However, you may end up losing the car if you are unable to keep up with repayments.

#2. Hire Purchase

A deposit is frequently required to take an automobile away under a car hire purchase arrangement. You’ll subsequently make monthly payments toward the car’s cost. However, you won’t own it (or be able to market it discreetly) until you make the final payment. Plus an additional ‘option to purchase’ charge of roughly £100-£200. This is unlike purchasing a car with a personal loan, in which you would pay cash for the vehicle at the beginning of your repayment schedule.

Furthermore, with a hire purchase arrangement, you have a secure debt against the vehicle. This means that if you default on your payments, the company may repossess the vehicle to recoup the money you owe.

Nonetheless, you may have to pay a penalty fee if you stop a hire purchase arrangement early.

#3. 0% Finance

Some cars have a finance option that allows you to put down a deposit and pay the rest in monthly installments. This option may require a hefty down payment, and your monthly payments may be rather high. However, if you keep to the terms of the arrangement and make all of the regular payments on time and accurately, you should never have to pay any interest on the debt.

#4. Leasing

While you purchase a car, you never really own the car; instead, you pay monthly to use it. The car’s value will normally determine the amount you’ll be paying, the length of time you’ll be driving it, and an agreed-upon distance limitation. Users might spend less per month than what they would when they were financing a car. Whereas there could be additional expenses.

Additionally, You may well be billed an ‘extreme wear-and-tear’ fee. This is if indeed the automobile is a little scratched up after the leasing. However, you will certainly require full coverage of car insurance. Otherwise, you’ll have to pay the damages to such an automobile out of yourself whenever you give it back. Certain businesses may require you to get collision coverage, which provides them with extra protection from theft and damage.

#5. Personal Contract Purchase (PCP)

PCP financing is amongst the most popular ways to finance a new vehicle. Although, sometimes it can also become one of the most complicated. Users won’t be able to afford to buy the automobile outright with PCP. Alternatively, you’ll throw aside a non-refundable down payment and loan the remainder of the car’s cost. After that, you’ll make monthly mortgage payments to protect interests and devaluation costs (i.e. what the car loses in value while you have it).

Individuals who always want to replace their cars on a routine basis frequently utilize PCP loans. These have the benefit of being rather adjustable, and because you are not buying off the vehicle, they normally have cheap monthly installments. Nevertheless, borrowing costs on these loans are frequently higher than most other sorts of loans. One also must read the fine print thoroughly. This is especially for penalties for surpassing the distance limitation and causing damage to the automobile when it’s in use.

You’ll almost always need a solid credit score to get certified for a PCP arrangement, particularly for 0% or low APR rates.

#6. 0% On Purchases With Credit Card

One other alternative is to buy your automobile outright with a 0% purchasing credit card since several car salesmen now accept credit cards. However, to receive a better limit on a buy card, you will probably need an excellent credit score. As a result, this choice may very well be best for persons having excellent credit as well as those seeking a low-cost vehicle.

#7. Conditional Sale

A conditional sale, just like a hire purchase, is a way to buy a car on credit. Throughout the loan’s period, you’ll normally pay a deposit after which you will pay equal monthly repayments.

Also, the terms “conditional sale” and “hire buy” are often used interchangeably. The main distinction is that for a conditional sale, there is nothing like an “option to purchase” fee. Whenever you pay off the mortgage in full, you will automatically become the new possessor of the car.

In addition, with something like a conditional sale, there are no mileage fees, and most of the hire purchase agreements don’t usually include distance constraints or limitations.

#8. Bank Loan

This is when you borrow an agreed amount from a major bank, such as your own, for a specified period. It’s common for bank loan interest rates to be lower if you agree to pay back the money in a shorter period.

Types of Car Finance UK

Generally, it’s not easy to get a car loan in the UK. There are a variety of options available for consumers wishing to finance the purchase of any type of car, but if you choose the wrong one, you may end up paying a lot of interest and other fees, making the car substantially more expensive than if you paid cash.

On the contrary, the appropriate financing for your situation might assist you in making a purchase that is in line with your particular financial goals. Undeniably paying cash can save you money, but if you don’t have the cash, financing will help you get a car. Car financing in the UK however include:

#1. Hire Purchase

Hire purchasing is a sort of automobile financing that allows you to acquire a car after your loan acquiring it with a minimal down payment and monthly payments. It is a secured loan in which the car serves as security for the loan amount. You make agreed-upon monthly payments after paying a deposit (which is normally included in hire purchase vehicle finance programs, not always though).

However, because of the nature of the hire buy, you will not have the car until you pay the entire sum. You would generally have to pay an “option-to-purchase” charge at the end of the agreement, in addition to the very last monthly payment, to acquire the car completely from the dealer.

Additionally, if you’re making a deposit, usually a minimum of 10%, you can pay more if you want though, you will reduce the loan amount and, as a result, reduce the interest rate you will pay, which will make you be able to pay off the loan faster.

A hire purchases agreement’s loan period ranges from one to five years. This however depends on vendors or providers.

Pros of Hire Buy

• Flexible loan terms — the shorter the loan period, the lesser interest you may pay.
• Spread the expense of an automobile over a longer period.

• The deposit is rather low.

• To own a car, there is only a nominal charge to pay at the end.

Cons

• If you don’t make your payments, your automobile may be repossessed.

• You won’t be able to sell or modify the vehicle until you buy it.

• As a short-term alternative, it can be costly.

Personal Contract Purchase

Personal contract purchase (PCP) is a type of car financing similar to hire purchase in the sense that people pay a deposit for the vehicle and afterward pay back the debt in monthly installment payments.

The lender does not, however, return the complete price of the car in equal monthly payments while using PCP. Rather, they pay fewer monthly payments to cover devaluation and then opt to pay a greater sum at the completion of the contract to acquire the vehicle. This amount is also referred to as a balloon payment. The balloon payment is calculated using the guaranteed minimum future value (GMFV). Which is determined by the producer at the commencement of the contract depending on their projection of the value of the car at the expiry of the contract.

On the other hand, if everything goes according to plan, the value of the car will be more than the GMFV. This means that if you decide to return the automobile, you may use the cost of the vehicle to pay off the outstanding debt and use the rest toward a deposit on a new financing plan. A PCP plan typically lasts 3-5 years.

Pros of PCP

• Flexible payment options

Changing the contract’s term, mileage, and deposit will modify the monthly payments, allowing you to tailor it to your budget.

• Possibility to build equity

When it comes to keeping or parting with the car, there’s a chance it’s worth more than the outstanding finance, which you can use as a deposit on your next vehicle.

• Low-cost monthly installments–

Because there is a final balloon payment, a significant portion of the car’s worth is kept back until the end, resulting in cheaper payments than with hire purchase or bank loans, where you would pay off the entire car’s value during the length of the arrangement.

• Low-cost initial installment

• Fixed monthly payments that may be less expensive than other types of car finance

• If you don’t want to pay the balloon payment, you can return the vehicle.

Cons

• During the contract duration, you will not own the vehicle.
• Excessive damages will be assessed against you.
• If you exceed the agreed-upon mileage, you will be charged.
• To own any tpes of car, you’d have to pay a significant fee at the end of the plan.

Personal Leasing

PCH or BCH, often known as leasing, is similar to renting a car but for a longer period, usually between two and four years. When you choose this sort of financing, you can choose from a wide range of new vehicle types and models. Leasing is the most popular option for consumers shopping for a new automobile in the UK since it gives the lowest monthly payments compared to other methods of car financing.

You’ll hand over the vehicle to the leasing company after the lease; there’s no option to buy the car, therefore personal leasing is ideal for people who value flexibility. Personal leasing may be appropriate if you just need to drive for a few years and then go home to a city with other transit systems, or perhaps if you just want to switch cars frequently so you can always be driving the latest model.

Pros of Leasing

• Get a brand new car.

• Monthly payments are usually lower than with alternative financing options.

• The manufacturer’s warranty covers mechanical issues.

• Other car-related expenses, such as servicing and taxes, may be included.
• Easy Budgeting – Fixed costs allow you to budget exactly what you will be paying over the term of a lease.

• No or low down payment -the monthly payments will be lower if you make a larger initial payment. The total cost remains the same regardless of how much money you put in upfront, so it is fair to everyone.

• Free UK mainland delivery to your front door or wherever you need it on the day.

• There are no hidden charges.

Cons

• There is no option to acquire the car.

• You are unable to alter the car.

• Limits on mileage

• Even if your auto is written off, you’re still obligated to pay off the lease.

• It might be challenging to break a lease early.

Guarantor Car Financing

Guarantor car financing performs the role of assisting drivers with weak credit scores in obtaining financing to purchase a car. When applying for this loan, you must designate a guarantor who promises to make the payments if the borrower fails to do so.

Although the applicant is still responsible for the repayments, naming a guarantor reduces the risk for the lender.

On the other hand, younger drivers with a limited credit history may find it difficult to obtain financing on their own. Guarantor car finance may be an option for them. However, the forms of guarantor finance available will differ depending on the source.

Pros of Guarantor Finance

• Aids people with poor credit in getting finance 

• You might be able to borrow more money with a guarantor than you could without one.

• Allows you to spread the expense of an automobile over a longer period.

Cons

• Failure to make payments may have an impact on the relationship between the borrower and the guarantor.

• Interest rates may be greater than those offered by other options.

• If you don’t make your payments, your credit score and that of your guarantor may suffer, and this may also lead to the repossession of your car.

What I Need To Know Before Applying For the Different Types of Car Finance

Here are a few things to think about before applying for a loan, credit card, or any other kind of credit to finance your new car:

• How much money do you require?

• What is the most amount you can afford to pay back each month?

• What kind of interest rate are you getting? Can you afford a rate increase if it’s variable?

• How much time do you want to take to repay the loan?

• How much interest are you willing to pay in total?

• Do you want to own the car, and is it going to be sooner?
• How long do you think it will be before you have to replace your automobile again?

• Are you okay with a mileage restriction?

• How much mileage do you plan on putting in?

• Are there any other expenditures, such as additional insurance or penalty fees?

Finally, keep in mind that owning a car entails continuing expenses. Insurance, road tax, MOTs, petrol, repairs, and other expenses will be incurred. Make sure you can afford the monthly payments on top of the costs of owning and operating different types of car, as well as all of other existing financial obligations, which may alter over time, prior to you signing a car loan arrangement. Delinquencies can have a negative influence on your credit score, making it even more difficult to obtain credit in the future.

Conclusion

There are a variety of options available for consumers wishing to finance the purchase of a car, but if you choose the inappropriate package, you may end up paying a lot of interest and other fees, making the car substantially more expensive than if you’re paying in cash. On the other hand, the appropriate financing for your situation might assist you in making a purchase that is in line with your particular financial goals. Paying cash can save you money and be cheaper, however, if you don’t have the cash, the different types of car finance available will help you get a car.

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