Finance is a great way to spread the cost of owning your next vehicle into affordable payments. For some people though, car finance can seem daunting, but you can take the stress out of getting a car loan with this handy guide. We will explore what car finance is and the different types of agreements available and how it can benefit you.
What is car finance?
Car finance is a legal finance agreement which is between you and the finance lender. Car finance is usually when a lender agrees to borrow you the money to buy the car you want. You then pay it back monthly with added interest to an agreed finance term. Finance is usually spread over 1-5 years. To get accepted for car finance, you will usually have to pass a credit and affordability check. Car loans are never guaranteed and aren’t suitable for everyone. There are a number of different car finance agreements in the UK, and each can be more suited to some people than others, depending on what you want from your car finance deal.
Which type of car loan agreement deal is right for you?
There are 3 main car loan agreements that are the most popular in the UK. Each has similarities but there are a few main differences.
A personal loan is one of the most straightforward ways to buy a car but having bad credit could hold you back from getting accepted. Personal loans can be provided by banks or building societies and are mostly offered to people with good credit scores. A personal loan is an agreed amount that is deposited into your bank account, usually the same day. You can then use this amount to pay for a car. A personal loan can be sued for whatever you want, and the lender won’t own the car. This means you will have full ownership of the chosen car and you can choose when you want to sell it or modify it. You then make a monthly repayment to the finance lender with added interest to an agreed term.
Hire purchase is a type of secured car loan. A secured loan is ‘secured’ against the car you choose to get. This means it belongs to the lender until you have made the final payment. You would apply for finance on your chosen car, pay a deposit and then pay it back monthly with interest. Once the final payment has been made, you are then the automatic owner of the car.
Personal Contract Purchase
Personal Contract Purchase is similar to Hire Purchase. Except the loan amount does not cover the full cost of the car. The lender owns the car throughout the agreement. Monthly payments tend to be lower and at the end of the contract, you have 3 options. You can either hand the car back to the dealer and walk away, pay the balloon payment, and keep the car or use the value on a new PCP deal.
What are the benefits of taking out a car loan?
There are a number of advantages to getting a vehicle on finance.
- Get a better car. Compared to paying with cash, you can usually afford to get a better car and spread the cost.
- Fixed payments. You know exactly what you are paying with fixed monthly payments.
- No deposit options. If you don’t have any savings, you can also get no deposit car finance deals with affordable monthly repayments.
- Improve credit score. You can use your car finance deal to improve your credit score by making repayments each month on time and in full.
- Protect your savings. You don’t have to fork out a lump sum for a car. You can keep your savings to spend on other things.
- Part exchange. You can use the value of your current car as a deposit for a car on finance.