Getting a new car is an exciting experience for any car buyer. At the same time, it can be daunting as well. You’re going to encounter a good number of technical terms that can be a bit confusing. But don’t worry because we’re here to help you identify which car finance option is best for you.
Hire Purchase Car Finance
A hire purchase deal is a lot like getting a mortgage. With this arrangement, you have to pay a downpayment for the car and then pay the remaining balance through monthly instalments for a period of one to seven years, depending on your contract.
Whenever you pay for the car, the payment goes to the principal amount, as well as interest. Once you’ve reached the end of your contract and you’ve been paying the monthly instalments promptly, then the car is yours.
What’s great about this car finance deal is that there are usually no mileage restrictions so you can use the car all you want. Also, the contract term length can be flexible. Depending on your financial situation, you may choose a short-term contract like three years or you can go for a longer term contract like seven years.
One of the disadvantages of getting a hire purchase agreement is that the lender can repossess your vehicle if you miss making payments. It’s important that you pay your monthly instalments on time so that the car won’t be taken from you. Other than that, the repossession will impact your credit score negatively. It will make it difficult for you to get financing in the future.
Personal Contract Purchase
This car finance arrangement is perfect for drivers who want to change their vehicle every few years. With a PCP deal, you won’t be borrowing the full cost of the vehicle. It will only cover the difference between the value of the car while it’s still brand new and its value by the end of your contract.
Here’s how it works. If you get a PCP agreement with a contract of three years and the car’s price is £10,000, the lender might say that the car’s value will be £5,000 by the end of your contract. After that, you’ll pay a deposit of 10% of the car’s value which is £1,000. With a PCP deal, you’re only going to pay £4,000 for the next three years.
While you’re paying the monthly instalment, you’ll also pay interest. And when you reach the end of your contract, you can pay the remaining £5,000 so you can own the vehicle. You also have the option of returning the vehicle. You don’t have to pay anything else if the car is still in good condition and you didn’t go beyond the agreed mileage limit.
When you lease a car, it’s a lot like renting one but for a longer term. It’s almost the same as the first two car finance deals because you will also have to pay a monthly fee for a certain period. You will also have to pay a deposit to lease a car. When you’ve finished your contract, you simply have to return the vehicle. You need to make sure it’s in good condition and within the mileage limits so that you don’t have to pay extra.
An advantage of leasing a car is that since you don’t own it, you’re never going to worry about the car’s depreciating value over time. This car finance deal also has the lowest monthly payment amount, so if you’re looking for affordability, this is a good arrangement.
As for the disadvantages, the car will never be yours even after years of paying for it so you need to hand it back when your contract ends. You also need to be careful with the car because it has to be in sellable condition when you return it. Any damage beyond the expected wear and tear would mean additional expenses for you.
Getting a personal loan is borrowing a certain amount from a lender so you can buy the car. You will then have to pay the lender through monthly instalments. As with all kinds of financing, you’re going to pay interest for a personal loan. Once approved, the amount will be deposited into your account and you can then use it to buy the car you want.
Personal loans are usually granted to borrowers with excellent credit scores and histories. If you’re confident with your credit rating, you should try to get a personal loan. The amount that will be lent to you will depend on the lender’s assessment of your credit record. Only apply for a personal loan if you have prime or super-prime credit scores because if you get rejected, it can knock a few points from your credit score.
A personal loan is a great choice because you’ll be paying the car dealer with cash. This means you’ll own the car outright. There are also no limitations such as mileage limits. A key disadvantage is that the car’s value will depreciate in time so if you plan on selling it, the car will be worth less than the amount you borrowed to buy it.
Usually, the monthly repayment amount for personal loans is higher compared to other types of financing. However, it depends a great deal on the specific terms of the lender, the amount you borrowed, the interest rate, and other necessary costs.
These are some of the best options if you’re looking to finance your car purchase. Evaluate your personal circumstances and financial situation so you can decide better on which type of financing will be best for you.
For more car finance tips and other helpful articles, make sure you check the Carmoola blog. We’re here to help you get closer to your dream of driving that awesome car! For any questions, don’t hesitate to reach out. We’d love to talk to you about the Carmoola car finance deals.