Getting a car loan for the first time? Taken out car finance before but it never really went as smoothly as you were hoping for? Feeling stressed, strained, and burned out by everything you need to consider? Confused by all the different types of finance plans out there and how they work? We’ve got you covered! We’ve taken some of the overwhelming jargon and technical terms and transformed them into a comprehensive checklist for car finance. Let’s dive right in! 🚗
What Are the Different Types of Car Finance?
The Hire Purchase
A hire purchase agreement is when you buy a car and pay it back in monthly instalments. The loan is secured against the car itself, which means it’s not really yours until you finish completely paying it off. You’ll usually have to put down a deposit of around 10% of the car’s value, sometimes more. Then, you’ll have 12 to 60 months to pay off the rest of the car’s value. You can get hire purchase deals with banks, specialist finance companies, and other financial institutions including some car dealerships.
The Personal Loan
Personal loans are a type of car finance that you can take out via a bank or other financial institution that isn’t necessarily specialised in cars. You’ll pay a fixed amount per month plus interest. That’s why it’s important to check the interest rates offered in each agreement because rates will vary greatly depending on which lender you choose. The full interest rate or APR (which includes any additional fees or charges) will also depend on your credit score. In fact, you’ll most likely see your application declined if you do not have a good credit score. The main advantage of a personal loan is that the car will be yours when you purchase it, but do expect to pay a higher rate of interest on any unsecured loan.
The Personal Contract Purchase
Personal Contract Purchase (PCP) deals are usually more affordable than hire purchase agreements. You won’t be paying the full price of the car with the monthly instalments, but rather for an amount that takes into consideration the depreciation of the car while you’re using it. That’s why you’ll most likely find that PCP monthly payments are quite significantly lower than with hire purchase agreements.
However, the downside is that once your contract is over, you’re going to have to pay a balloon payment if you want to own the car. This final payment is actually optional, and you can hand over the car if you don’t want it without incurring any extra costs. That is only if you haven’t gone beyond the agreed mileage limits and haven’t damaged the car - otherwise, you might have to pay penalties.
How to Get the Best Car Loan Deal?
Unfortunately, there’s no secret, no magic recipe. Getting the best car loan deal will come down to how much shopping around and research you did. It’s usually not a good idea to go for the first car loan deal that you find - there are so many lenders in the UK that you have an abundance of options to choose from. Let’s go through a few tips and tricks you can use to make sure you’re getting the very best car loan deal, tailored to your situation. You might want to check out our blog specifically about getting the best car loan deal.
Choose the Right Loan Term
When it comes to loan terms, it really is the shorter the better, if you can afford the higher monthly repayments. . Choosing the right loan term can get you significantly better interest rates. If an important factor for you is low interest rates, then it may be worth exploring putting down the highest deposit you can afford and setting the loan term to the shortest possible. You can play around with these different factors by using our car loan calculator. It’s all about finding the right combination of factors to find the right loan for you!
Shop Around for the Best Interest Rates
Think about it: charging interest rates on loans is how finance providers make money. Of course, they’re going to want to try and charge people as much as they can get away with. Because that’s their profit margin, right?
Well, as a finance consumer, you don't have to fall victim to astoundingly high interest rates. Some car loans can go as high as 30% interest rates, which is absolutely crazy, especially when you realise that you can get 0% interest rate loans if you shop around properly. Although of course these are mostly available on new cars, so that might not be an option for you. Our advice would therefore be to spend quite a bit of time looking at different loans to find the one with the best interest rate. Do this by checking the APR of each loan - this is calculated in the same way by all lenders and includes any additional fees levied by the lender - so it's your benchmark figure for comparing like for like.
A quick tip: most mainstream car finance providers will let you apply for a decision in principle before you commit to a loan agreement. Decisions in principle are basically documents that detail all of the loan terms plus interest rates. This is a great way of comparing different options and seeing which interest rate is lower. Do be aware though that when you actually fully apply for a loan, a record of it is made on your credit score. That’s why you should only stick to decisions in principle while you shop around for loans.
Go for Convenience
Bear in mind that it’s really important to have a flexible loan. You’re planning a consistent outgoing amount for the next few months, or even years, so you want to have options in case your circumstances change. Consider the following: How difficult is it to get a car loan from a lender? Is it awfully hard to get in touch? Can you easily contact them by phone? With today’s technology, you can get a car loan using your smartphone. No need to be put on hold for hours, waiting for a bored sales representative to answer your call. Choose a car finance company that makes it easy for you to buy your dream car.
Read the Fine Print
Before signing any car loan agreement, make sure that you understand all the terms and conditions and everything within it. How much do you need to pay every month? What are the penalties for late payment? How about early repayment? Know and understand the fees and charges. If there’s anything that’s confusing or vague to you, don’t hesitate to ask questions. A good car finance company will be more than happy to help you.
Choosing the best car loan deal can be overwhelming - there are so many options to choose from. All lenders will claim that they’re the best ones out there. However, that’s something you’re going to need to determine for yourself. So do your research, know your budget, and see if their deals fit your financial situation.
The “best” car loan deal may not be the most appropriate for your particular situation or personal preference. Don’t worry if you’re spending a long time evaluating your choices. It’s better to take time than to make a hasty decision that may not be the best one for you.
And once you have found a great finance deal you will need a great car - we have had a look at some great value family cars - checkout our blog on that here!