Are you thinking of upgrading your car or getting a new one? Exciting! 😃 But are you wondering what might be the best way to finance to purchase it? 🤔 It's now very straightforward to get finance to fund your venture. Auto purchases require a substantial amount of cash. You can decide to make a lump-sum payment if you have the cash, or you could just put down a deposit and then make monthly payments to spread the cost. Most buyers will opt for the latter, but there are a number of ways to do this.
Lenders in the UK offer different car finance options for buyers. For individuals who can't afford to make a payment in cash outright, they offer the opportunity to help spread the cost over a set term.
How can you decide on the best deals? Are you a bit confused over all the different finance plans and their pros and cons? We can walk you through some of the alternatives.
Paying for a car via cash is one of the cheapest ways to make a purchase. You don't have to make any extra payments in the coming months. With this car finance option, you pay for the vehicle in one lump sum payment.
Unlike loans, there are no rules that limit the use of your car. You have the freedom to use your car as you like. Also, this means you can sell it if you need some money urgently, without early repayment fees or restrictions.
This financing option is good only if you have your savings available. It's not advisable to use your emergency fund to pay for a vehicle. It's a risky move in case you run into financial difficulties. And you might not want to be penalised if your savings are locked into a long term investment.
Hire Purchase (HP)
When looking at financing options for cars, you might consider using a hire purchase plan. Auto financing companies and dealerships provide this type of financing. As an alternative, HP is suitable if you can't afford to make cash payments.
When you sign a finance agreement, the dealer requires you to pay a deposit, usually around 10% of the value of the car, and pay the rest of the cost of the car over a fixed period. The monthly payments are a combination of the repayment of the principal sum borrowed, and interest charged on the loan.
The loan is secured using the car as collateral. If you miss or default any payments, the lender can quickly repossess the vehicle if you cannot reach an agreement. Furthermore, with this car finance option, you don't have full ownership of the car until the end of the loan term. but then once the full sum is repaid the car is yours.
Personal Contract Purchase (PCP)
The option of a PCP offers buyers a similar arrangement to HP, but the payments are lower as you are only covering the depreciation value of the car. But at the end of the agreed term, you will have three alternatives.
Once your loan term expires, you can either return the car with no further payment to make, or trade it in for a new one, or opt to pay a final "balloon payment" that gives you full vehicle ownership.
This equates to the final value of the vehicle at this point in time. This deal also includes mileage limits which at agreed at the outset and then you should maintain within the loan term. If you go over there will be a charge, which should be part of the agreement - make sure you know what that is.
Furthermore, the dealer will charge you for any repairs needed on the car if you have caused damage over and above usual wear and tear.
Leasing or Personal Contract Hire (PCH)
Dealerships offer this type of financing for buyers who want to hold a car for a short time. It's just like hiring a car but over a longer period. The lease contracts could be between 2 -3 years. Over the loan term period, buyers need to pay for the long term rental, which covers the depreciation costs.
This can cost more per month than a PCP or HP but this amount can sometimes include insurance or car tax or servicing. So you need to do the maths and look at overall costs. Similar to a PCP financing deal, there are mileage limits that you shouldn't exceed. The lender will charge you for going above the set limits. The same also applies to damage to the vehicle.
At the end of the finance contract, you have to return the car to the lender. PCH is a good car finance option for buyers who like to change cars often to access the latest models.
Personal loans are a go-to car finance option for buyers with a stellar credit history. You can apply for a loan from a bank or a credit union. The lender requires the borrower to pay off the loan in fixed monthly payments over a set period. The loan term can range from 1-7 years.
The advantage of this alternative is that you own the car as soon as you get it. You can make changes or even sell it. If you plan to keep the car for a long time, personal loans are the best option. You also don't necessarily need to pay a deposit.
You can get a reasonable annual percentage rate (APR) from the lender if you have a good credit score. Work on improving your rating if you plan to get a loan from the bank. But you also have to think that you might pay a bit higher APR because the loan is unsecured.
What To Think About When Selecting Your Car Finance Option
Before choosing a car finance option, compare market interest rates. Research the interest rates charged by different lenders to make sure you get the best deal. Also, examine the factors that affect your interest rate using a finance calculator, such as loan term, credit rating, and deposit.
Terms and Conditions
If you can purchase a new or used car using cash, go for it, but think about if you still have an emergency reserve. This method will of course save you from paying the interest to a lender.
However, if you choose to go with dealership financing, you have to consider the terms and conditions in the finance agreement and whether you can meet them and are happy with the small print, such as penalties, excess mileage, undue damage, or early settlement charges. Always read them carefully, and ask if anything seems unclear.
Purchasing a car successfully depends on your financial situation. Some buyers can afford to pay for the vehicle in one outright payment while others can't.
As a buyer, analyse your personal financial situation and whether you can sustain monthly payments over a few years. Do an affordability check and also think how much the associated costs will be and factor these into the calculation. You will have to pay at least insurance, road tax, servicing and repairs, and fuel and parking. These can soon add up!
With PCP, HP, and leasing car finance options, you don't own the car. until the sum borrowed is fully repaid. This means you can't sell or make any changes until you pay off the loan amount.
With leasing and PCP, you can return the vehicle at the end of a contract and get a new one. However, if you want to keep the car for longer, it's best to go for an HP, use cash, or take out a personal loan.
A car purchase requires a huge monetary commitment. You can choose amongst the several car finance options to fund your purchase, depending on your current and expected financial situation. All these alternatives come with their own set of rules and regulations; therefore, it's advisable to research them well before deciding which way to go.
Here at Carmoola, we have the most simple process in the market. You can get a decision within minutes of your application, and get cracking with buying your new ride.