Car Finance Options Explained
Car Finance Options Explained - Which is Best?
There are four main car finance options available to retail customers to fund the purchase of a new car if you don’t have the cash in the bank.
The choice of which car finance option is the best depends on whether you are looking to pay the loan off quickly and own the car at the end of the term or have a lower monthly repayment with the option of handing the car back to the finance company at the end of the finance agreement.
Personal Contract Purchase or PCP
A PCP is a great way to buy a car if you change your car for a new one every 2 or 3 years. It also has the added benefit that the future value is guaranteed by the finance company so if your car is worth less than the final payment you can hand the car back without penalty.
When taking out a PCP deal you declare your annual mileage which is then used to calculate the final payment at the end of the contract period. If you do more miles than stated in the contract there will be an excess mileage charge applied.
There are also stipulations in the agreement regarding the vehicle’s service history and general condition so that the value of the vehicle is not affected should you wish to hand it back.
With a PCP, you pay a deposit, then make monthly repayments for 2, 3 or 4 years. At the end of the agreement you can either:
1) Hand the car back to the finance company,
2) Part-exchange it for another, or
3) Pay the remaining lump sum and the vehicle becomes yours.
Benefits to you:
* You can change your car more reguarly.
* You can afford a better car for a lower fixed monthly payment over a shorter term.
* Guaranteed future value eliminates risk of negative money equity and protects against deprecation.
* Flexible options at the end of the agreement to fit in with your personal circumstances
* You have the additional option to settle the agreement early and you will be given a rebate on interest charges.
Hire Purchase (HP)
Hire Purchase is a simple and traditional way to fund your new vehicle. It involves fixed monthly payments over a period of time between 12 and 60 months. Once all payments have been made the vehicle is yours. It leaves other credit requirements undisturbed as the loan is secured on the vehicle, leaving your bank free for future emergencies and opportunities. You also get the benefit of fixed interest rates and monthly payments plus low and zero deposit deals are available.
When considering your car finance options it’s worth remembering that your bank and other direct lenders are not as tightly regulated as hire purchase lenders. This gives you many advantages – for example, you will benefit from a reduction on interest in the event of you wanting to settle early on a hire purchase loan. This is very rare on a personal loan.
Low Payment Plan
If you’re looking for the lowest monthly payment possible then a Low Payment Plan could be the answer. A LPP is similar to a PCP apart from at the end of the contract you have to pay the final lump sum and the vehicle becomes yours.
Alternatively, you can part-exchange your car for a newer one. There is no option to hand the vehicle back to the finance company.
Personal Loan
A personal loan is a simple and quick option although the low interest rates of a few years ago seem to be a thing of the past now. You simply apply for a loan from your bank, building society or from a direct lender. The interest rate charged will be determined by your credit score. For people with good credit scores you are likely to get a low interest rate, with weaker credit score the interest rate will be higher. Check your credit score at Experian. Click here for your free credit report.