Buying a new car is one of the biggest financial undertakings for many people in the UK. Most of us don’t have thousands of pounds saved in the bank, ready to splurge on a car, but we do need the convenience of a vehicle.
Car finance is a great solution to this problem. There are various financial products available to help you buy a car without burning through all your savings. Instead of paying the full cost of the car outright, car finance allows buyers to spread the cost over a period, making the purchase more manageable.
In this blog post, we look at the different types of car finance available and how to find the best one for you.
Types of Car Finance Agreements
There are several types of car finance agreements available, each with specific terms and conditions. The most common are personal loans, hire purchase agreements, personal contract purchase (PCP) and personal contract hire (PCH).
1. Personal Loans: A personal loan is a popular choice for car finance. It involves borrowing a fixed amount from a finance company, which you repay with interest through fixed monthly repayments. This option is preferred by those who wish to own the car outright from the start.
2. Hire Purchase: Under a hire purchase agreement, you pay an initial deposit and then repay the remaining balance through manageable monthly payments. The car becomes yours after the final payment. This option often involves higher monthly payments than other finance forms but leads to outright ownership of the vehicle.
3. Personal Contract Purchase (PCP): PCP is a flexible option with lower monthly payments. At the end of the term, you have the options to make a final payment to own the car, return it or trade it in. The guaranteed minimum future value of the car is determined at the start of the agreement.
4. Personal Contract Hire (PCH): PCH is essentially a long-term rental. You make monthly repayments to use the car but don't own it. At the end of the term, you simply return the car. This option is attractive for those who prefer to drive a new car every few years without the hassle of selling it later.
Choosing the Right Car Finance Option
When choosing a car finance option, it is vital to consider your individual circumstances, including financial stability, credit history and long-term vehicle plans.
Financial Stability
Financial stability involves assessing not just current finances but also future economic resilience. This helps determine the feasibility of regular monthly payments and their manageable size. Those with a steady income and robust savings may be more comfortable with larger monthly payments or significant final lump sums.
Good Credit History
Credit history is another crucial factor. A strong credit rating can lead to more favourable borrowing terms, giving you access to lower interest rates or higher loan amounts. This makes personal loans or hire purchase agreements attractive for those with good credit. With a personal loan, better interest rates can reduce the overall car cost, while a hire purchase agreement can benefit from lower deposits and monthly payments with a strong credit score.
Poor Credit History
For individuals with less stable finances or a less favourable credit history, Personal Contract Purchase (PCP) or Personal Contract Hire (PCH) can be more suitable. These options offer lower monthly payments, appealing to those who prefer a more manageable financial commitment or wish to change cars regularly without the burden of a large upfront payment.
Car Finance Is Not For Everyone
It is important to consider the total cost of the finance option chosen, including the interest rate and any additional fees. For agreements like PCP, the final payment or balloon payment should be planned for if the intention is to own the car. Additionally, it is crucial to understand the implications of early repayment or defaulting on monthly repayments.
Car finance is diverse and complex and there are several options that are designed to suit different needs and preferences. Understanding the terms of each car finance agreement, your financial situation and long-term car ownership goals is key to making the right choice. Whether it is a personal loan, hire purchase, PCP or PCH, each option offers unique advantages that can help make owning your dream car a reality.
