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When the time comes to look for your next car, there are so many options available, it’s hard to know where to begin.
Often, you will have a budget in mind and that will be your starting point, but now, there’s multiple ways to finance a car, whether it’s an outright purchase, a bank loan or looking for the perfect car finance offer using a 3rd party provider.
Car finance is just one way to secure the funds for your new vehicle, but it’s important to understand the pros and cons of car finance before you head to the dealership. In fact, it’s a good idea to see exactly how much you could borrow as this will often give you a clear budget that you need to stick to and what wiggle room you have if you happen to have some cash saved up.
Simply put, car finance is the process of borrowing funds against your car purchase rather than needing to have the purchase price readily available in cash. With car finance, you will usually pay back the load in monthly instalments, making the car much more affordable to you.
The type of car finance you opt for will determine how you pay back the loan, over what period and at what cost. You’ll need to know the types of car finance options available so you can decide which option is best for you and your financial situation, as not one shoe will fit all.
This is where car finance can become confusing; it’s not as simple as a bank loan, there are a wide range of car finance options available on the market, and you may be confused what all the acronyms mean. Never fear that’s why we’re here (to help guide you through your journey).
First up is PCP car finance, also known as Personal Contract Purchase. PCP finance means you have a deposit to pay on the car followed by fixed monthly repayments over an agreed time, usually 2-4 years.
With PCP finance, you will be provided with a few options at the end of your agreement;
Pros of PCP Finance
Cons of PCP Finance
PCP Finance can also be used on used cars, usually a few years old, as well as brand new cars, but interest rates tend to be slightly higher due to the existing depreciation of the vehicle.
It’s relatively straight forward, but important to understand clearly so you know exactly what you can and cannot afford.
Example PCP agreement
If you find a car for £15,000 and pay a deposit of £3,000, the remaining £12,000 is split between the predicted value at the end of the agreement and the amount you borrow. So, if the car is estimated to be valued at £5,000 by the time the agreement comes to an end, you will be borrowing the remaining £7,000 and pay monthly instalments based on this amount. You will then be given the option to purchase the car for the remaining £5,000, give the car back or put this value towards a new car. It’s important to know as well that you will be paying interest on the full £12,000 across the duration of your agreement.
HP car finance, or Hire Purchase as it’s often known, is where you are effectively renting the vehicle until it has been paid in full, at which point you will then own the vehicle.
You can reduce the monthly repayments on a Hire Purchase by paying a higher deposit at the start of the agreement. The size of your deposit will then determine your monthly payments.
With HP finance, you can pay off the remaining balance at any point during the agreement by requesting a final settlement amount from your lender.
Pros of HP Finance
Cons of HP Finance
HP finance works in a very similar fashion to PCP finance, with the added benefit that you get to keep the car at the end of the agreement.
Example HP agreement
If you find a car for £15,000 and pay a deposit of £3,000 you then repay the remaining with whatever interest rate you are given. So, let’s say you then have an APR of 21.5% to add on to this, you then have an amount of £17,415.55 to repay at a monthly cost of £362.82.
Used Car Finance
Car finance isn’t just available on brand new cars, it is also available on used cars too. Both PCP and HP car finance options can be used to finance a used car. Most used car dealers will work with finance companies, acting as a credit broker themselves rather than a lender. They may also have access to better deals.
There are plenty of ways to compare car finance deals and find one suitable to you and your requirements. For example, Money Supermarket allow you to compare multiple lenders with just one simple search, saving you both time and money. They may also help you find car finance if you have a bad credit score.
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