In the UK over 90% of new and used cars are bought using some form of credit or finance. But with the popularity of car finance on the rise, is it the right option for you? In the UK there are 3 main finance options which most people tend to go for, a personal loan option, hire purchase agreement and personal contract purchase (PCP). But how are they different and how do you know which is best suited to you? Let’s find out.
What is car finance?
Essentially, car finance is the ability to spread the cost of owning a car into affordable monthly payments. Getting a car on finance usually means that you can get a better car than you first thought and pay for it in fixed monthly payments. You should note that most car finance deals will require you to pass a credit check and having a better score can enable you access to better finance deals.
Hire purchase car finance
Hire Purchase is a really simple type of car finance agreement. Within a hire purchase agreement, you will usually pay a deposit and then fixed monthly payments with added interest till the end of your agreed term. A hire purchase deal is designed to spread the full cost of the car you want, whether it be brand new or a used car too. The finance company owns the car until you have made the final payment and paid off the value of the car, then the ownership will automatically be transferred to you. If you fail to meet your repayment deadline during your agreement, the lender has the right to take the car away from you if you don’t pay. Always remember you should only borrow what you can afford to pay back each month.
Personal Contract Purchase
A personal contract purchase or PCP deal is a little different to a Hire purchase deal. In the first instance, it is similar as you will pay a deposit and then fixed monthly payments with interest. However, PCP deals tend to be cheaper monthly payments than hire purchase as you aren’t paying off the full cost of the car. PCP deals are a great choice for people who want to change their car more regularly. At the end of your agreement, you can pay the balloon payment to keep the car, hand the car back to the dealership or you can use the value towards a new car on another PCP deal. Most people tend to hand the car back to the dealer so at the start of the agreement, the lender will usually require milage limits and that the car is kept in good condition throughout the deal.
Personal loan
If you are applying for car finance with bad credit, a personal loan can be harder to obtain. Personal loans are usually offered to people with good credit score by banks or building societies. Personal loans can be used for pretty much anything. Many new drivers opt for a personal loan and pay for their car and their first year’s insurance at once, as it can be quite expensive. You can apply for a certain amount that you want to buy a car for or for part of owning a car. You then make fixed monthly payments with added interest over 1 to 7 years. You can then buy a car from any dealership or private seller. You will own the car from the start of the agreement, and you can sell it whenever you want to. Remember if you do sell the car before your agreement is up, you will continue to make payments till the end of the term.
