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Agreement Term: Car Finance Jargon Busters

When financing a car, it’s crucial to know and understand the agreement term. It states your responsibilities and obligations as a borrower and once you sign the contract, it means you have agreed with the terms and that you understood everything stated in the documents. But what is car finance agreement term exactly and what is commonly stated in it? 

What is Car Finance Agreement Term?

A car finance agreement term is a type of document that exists to protect two parties, the lender and the borrower. Usually, the lender is the one who creates the agreement term so the responsibility of including all the necessary terms of the car finance agreement falls on the party who will lend money to the borrower. 

An agreement term is a formal contract that the lender can use to take legal action in the event that the borrower stops paying back the money owed. Within the document, all details about the loan, such as the amount borrowed, interest rates, penalties, payment terms and specific schedules of the payments are included. 

Once the borrower understands and agrees to the terms and conditions by signing the contract, then it is a formal commitment that should be followed. If the borrower is late in making payments, they may face penalties as stated in the agreement. If they stop paying altogether, the lender has the right to take legal action to recoup the money they lent out. 

Types of Car Finance Agreements

Hire Purchase

HP is the preferred type of car finance among many car buyers. With this type of car finance agreement, the cost of the vehicle is spread over a series of monthly repayments. You first have to pay an initial deposit and then that will be subtracted from the amount you’ll borrow. When the agreement is finished, you will be the owner of the car. You may then decide whether you want to continue using it or resell it. 

An HP agreement can be paid over a certain period that is suitable to your financial situation. For example, you may pay off the loan in as short as 12 months. However, if you need more time, some lenders offer up to 60 months. Of course, the longer the loan term, the more interest you’d have to pay. It is recommended to choose a short loan term so that you don’t have to pay more than the actual value of the vehicle. 

Personal Contract Purchase

With PCP car finance agreements, a certain percentage of the value of the car is split between the deposit amount and the monthly repayments. When you reach the end of the contract, you usually have three options to choose from. 

You may trade the vehicle for a new one, buy the car you’ve been driving by paying the "balloon" payment, or return the car and walk away without having to pay for anything else. However, if the car incurred damage or has exceeded the mileage limits, you might have to pay penalty charges. 

Can You Have 2 Finance Agreements?

If your family needs two vehicles but you can’t afford to buy them with cash, is it possible to have two car finance agreements? The answer to this question is yes, you may finance more than one vehicle but you have to make sure that you can afford to pay for the monthly repayments, maintenance, repairs, insurance, taxes, and other expenses related to owning a vehicle

Many car buyers believe that they can only get one car finance agreement at a time but if the car finance company is satisfied that you’ll be able to manage to pay for two cars, then there wouldn’t be an issue if you want to apply for another car finance agreement. You just have to carefully assess your financial situation so you’ll be sure that you won’t face any financial difficulties when fulfilling your obligation of paying off the loans. 

Getting Out of Car Finance Agreement

Maybe you’re in a situation where you can no longer afford the repayments on your car. You might be asking, “how can I get out of my car finance agreement?” Here are some of the things you can do to end your car finance agreement early. 

Talk to the Lender

In case your financial circumstances have changed and it has become difficult for you to pay for the car, the first thing to do is to get in touch with the car finance company. The sooner you do this, the better. So as soon as you start to see that you’re having problems making payments, inform the lender immediately. 

The car finance company might be able to reduce the monthly payments so that they’ll be more affordable for you. This means your contract with them might be longer but the amount you have to pay every month would be smaller. 

Voluntary Surrender

If you’re really having a difficult time with your finances and can’t afford payments even if they’ve been adjusted to become more affordable for you, you may use Voluntary Surrender. With this, you will give the car back to the car finance company and walk away. It’s almost the same as having the vehicle repossessed. 

As much as possible though, avoid this route because it might be stressful for you. The lender would have to sell the vehicle so that it can recoup the amount you owe. However, if the amount they got when selling the car is less than the remaining loan balance, then the car finance company can demand that you pay the remaining amount by sending a debt collection agency.

Takeaway

Before getting any loan like car finance, see to it that you’re sure you can afford to make the monthly payments. In the event that you can no longer afford to pay, talk to the car finance company as soon as possible. Be honest and tell them you have no intention of running away from your obligation. They will work with you so a more affordable payment scheme can be arranged. 👍

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