If you’ve never taken out car finance before or have chosen an agreement that wasn’t right for you in the past, you may be wondering which one is best for your circumstances. In the UK, there are three main types of car finance agreements which tend to be the most popular amongst drivers. They include a personal loan, hire purchase car finance deal, and a Personal Contract Purchase agreement. Each agreement can be better suited to some people over others and can depend on what you want out of your finance agreement. It’s worth remembering that car finance is never guaranteed and can be subject to your personal circumstances.
The guide below has been designed to explore each car finance agreement in more detail and help you decide which is the best choice for you. Let’s take a look.
What is car finance?
There are different car finance agreements to choose from. But generally speaking, car finance consists of borrowing an amount from a lender and using it to purchase a new or used car of your choice. Car finance payments are made monthly till the end of an agreed term, usually between 1-5 years, depending on the agreement you choose. You will also be required to pay interest on most finance packages, which is included in your monthly payment. Some new cars can benefit from 0% interest rates too. The lower the interest rate you are offered by the lender, the less you will pay for car finance overall. Car finance can be secured with or without a deposit but it’s worth checking the rules of your agreement first.
Buying a car with a personal loan
A personal loan could be the cheapest way to finance a car, but only if you have a good credit score. Personal loans can be offered by banks or building societies and can be harder to obtain if you have a lower credit score. A personal loan can be used to buy whatever you like. You would request a set amount needed to buy a car and pay it back in monthly installments with interest. A personal loan is a type of no deposit car finance deal or if you want to reduce the loan amount you can choose to put down a deposit if you have one. You can choose whether you use a personal loan to pay for the full cost of your chosen car or use it to put down a deposit. Whichever you choose, a personal loan can be one of the simplest ways to finance a car.
Hire purchase car finance deals
A hire purchase is a secured loan and can be one of the most straightforward ways to spread the cost of owning a car. Within a hire purchase deal, you choose a car and spread the full cost into monthly repayments. Interest rates are included in your monthly price and can be spread over 1-5 years. The lender owns the car during the finance agreement but if you want to keep the car, you need to pay the ‘option to purchase fee at the end of the deal. The final payment is usually similar to your monthly payments so it can be easy to budget for. If you don’t want to keep the car, you can simply hand it back to the lender. There are no mileage restrictions associated with hire purchase deals and you won’t be charged any additional fees at the end of your agreement. It can be suited to people with bad credit as the lender can use the car as collateral if you fail to repay.
Financing a car with personal contract purchase (PCP)
A personal contract purchase or PCP deal is a form of hire purchase but instead of covering the whole cost of the car, you pay off the value of the depreciation. Depreciation is the difference between the cost of the car at the start of the agreement and how much it will be worth at the end. This tends to make PCP payments lower than other options and can be suited to those who want more flexibility from their car finance deal. If monthly payments are your main concern, PCP finance used cars can be the lowest to finance. However, PCP can be offered on both new and used cars and can last around 3-5 years. At the end of your PCP finance deal, you have three options. You can choose to hand the car back to the dealer and the finance has finished, you can use the resale value towards another car on PCP or you can pay the large balloon payment and keep the car. Most people choose to hand the car back at the end of the agreement so you will need to set an agreed annual mileage and keep the car in good condition throughout the agreement. If you fail to do so, you can incur additional charges at the end of the deal.
