Purchasing a car, whether used or brand new, is a costly affair. Depending on your financial capability, saving up the total amount of cash for a car can be challenging. For this reason, most people choose to purchase a car on finance.With different finance options such as hire purchase, leasing, and personal contract purchase, you can get a car on finance, meaning you take out a loan that you repay over time. Unlike personal savings, these options provide budget flexibility for the buyer. What makes purchasing a car on finance rather than with cash so popular? Let’s analyse some of these reasons.
Why Is Buying a Car on Finance Popular?
1. Flexibility in Payments
Most people don't have enough cash to purchase their dream cars in one sitting. Besides, not so many people would like to use up all their savings or emergency funds to acquire a vehicle. The primary reason that a lot of people buy a car on finance is due to its flexibility.
With the costs of cars rising significantly, it’s tougher to buy one in a lump sum payment. Cars have become essential in our day to day lives, hence the need to find a better option. With a bank loan or borrowing credit from your dealership, you can make an initial payment, and spread your monthly payments over a set period.
2. Better Car Models
When paying cash, you are restricted to only getting a car you can afford at that time. On the other hand, financing a car means you can go for a better, newer model or a more expensive car because you can pay it off over time.
Each year, there are massive improvements to new car models including better technology, enhanced safety, and comfort features. As a buyer using finance, you have the opportunity to drive a newer car instead of old second-hand models. Acquiring a car on finance allows you the chance to enjoy better functionality and design.
3. Credit Score Boost
Financing your car either via a personal loan or hire purchase improves your credit score. As long as you continue making regular payments on time, it demonstrates your ability to maintain your finances and meet obligations.
The key takeaways from this are that you don't miss any payments, and stick to the repayment schedule. Another advantage of regular payments is that if you need a credit loan in the future, finance companies are likely to approve you because of your strong credit score.
4. Fewer Restrictions
It’s now easier buying a car on finance, meaning it has fewer barriers in comparison to years ago. You can now get a vehicle from a dealership of your choice. The available options are also more flexible. You can get a personal loan to top up on cash for the car or apply for a Hire Purchase agreement for a car of your choice.
5. More Options
You could purchase a car today and want to get a newer model in the next year. Car financing options such as PCP give you room to decide if you want that car for life, or you can exchange it with another one. With this plan, once the period comes to an end, you can make a "balloon payment" to keep the car, or return the car to the dealership and move onto a new PCP plan on another car.
6. Perfect for Budgeting
A financed car means you know exactly how much money you need to pay as monthly instalments and how much you owe. Having this kind of plan allows you to budget for other areas of your life and expenses. Remember though, you must read and understand all the terms and conditions in your financing contract.
7. No Collateral
Unlike other loans, a car loan does not require security. The car itself is the collateral. If you default on monthly payments, the finance company has the power to repossess the car immediately. To avoid your car being repossessed and poor credit history, it's advisable to contact your lenders if you can't make any monthly payments, and discuss a payment plan with them.
8. Car Finance is Tax-Deductible
For individuals who own a business, if you purchase the car under the business name, the costs will be tax-deductible. You can make claims on the interest, insurance premiums, and more. These allowances enable you to lower the overall costs.
Types of Finance Options
Before settling on one car finance plan, analyse the different options available, paying attention to their benefits and disadvantages. Here are some of the most common options.
This type of financing allows you to borrow a lump sum amount from your bank or credit union. You are expected to make monthly repayments with added interest. This loan can be secured or unsecured, with the latter incurring higher interest rates. You can pay back the loan in 1 to 7 years. Check around for the best annual percentage rates before selecting a financial partner.
Hire Purchase (HP)
With this plan, you take the loan against the car. You will deposit approximately 10% and give fixed monthly contributions over a set time. These agreements are commonly made at the car dealership; therefore, very convenient. You will own the car once all the payments are made. HP agreements are usually taken over 2 to 5 years.
Financing a car via a credit card gives you protection in case anything goes wrong. If your credit card has a low rate, you can use this option. Some dealers will charge or 3% handling fee, while some don't accept credit cards.
Personal Contract Purchase (PCP)
Like the Hire Purchase plan, you make monthly payments, but with a larger balloon payment at the end of the contract. The monthly payments are usually lower. At the end of the contract, you can return the car, trade it up for another, or keep it.
Leasing or Personal Contract Hire (PCH)
With leasing, the dealer rents the car to you for a specific amount of time. The fixed monthly charge includes service and maintenance as long as you don’t exceed a set mileage limit. Once the contract expires, you return the car to the owner.
Before deciding to get a car on finance, make sure you can afford to meet the monthly payments. Do your due diligence and compare the terms offered by different financiers to get a reasonable rate. Remember not to miss any payment if you want to maintain an excellent credit score and keep your car.