Time for a new car? Not sure what’s the best way to finance it? The UK car finance industry is more popular than ever, with more than 2/3s of people choosing to finance or lease their next vehicle. There are a few different types of car loans that you can choose! Let’s take a look at the most popular car finance agreements and which could be the most suited to you.
Hire Purchase car loan
A Hire Purchase Car Finance deal is pretty straightforward. Hire purchase is a loan which equals to the full cost of your chosen vehicle, minus the initial deposit. You pay your loan back in fixed monthly payments with added interest and spread the cost over one to seven years. A deposit tends to be around 10% of the cost of the vehicle. Hire purchase can have higher monthly payments that some other options but it also had its advantages. At the end of the finance agreement, you will have a ‘transfer fee’ to take ownership of the vehicle. You can then do what you want with the car. You can also use hire purchase to finance a van, motorcycle or taxi.
Key points to consider about hire purchase car finance:
- You can pick a term to suit your budget. The longer you choose to pay off your loan, the cheaper the monthly payments will be, but you will pay more interest overall.
- It can be easier to get approved for Hire Purchase if you have a low credit score compared to other options.
- You can use a broker or dealer to sort your finance and must get a car from a FCA approved dealership.
- There are no mileage restrictions so you can use the car as much as you like
- The loan is secured against the car. This means the lenders has the right to take the car off you if you fail to meet your repayments.
- There is no large lump sum at the end of the agreement
A personal loan isn’t secured against a certain vehicle. You would for the amount you want to buy a car, scooter, or van and then if accepted, the amount is deposit into your bank account. You can then buy the vehicle you want from a dealer or private seller. You pay back the loan over one to seven years and make monthly payments with interest to a fixed term. If you sell your vehicle before the loan ends, you will still have to meet the repayment deadline.
Key points to consider about personal loans:
- It can be harder to obtain a personal loan and they are usually offered to people with a good credit score.
- One of the cheapest options in terms of total cost
- The car cannot be repossessed as it is an unsecured loan.
- Monthly payments remain the same throughout the agreement
- Loan values do not usually exceed £25,000
Personal Contract Purchase
Personal Contract Purchase tends to be the most popular choice for consumers. It’s similar to hire purchase but you only take out part of a loan to fund the car. The other part is known as the ‘balloon payment’ which you can choose to pay at the end. You can choose to pay the balloon payment and keep the car, use the resale value of the car towards another car on PCP or return the car to the dealer and walk away. Most people choose to hand their car back so it’s important that you look after your vehicle. The loan is secured against the vehicle so failing to meet your repayments means that you could lose the car.
Key points to consider about Personal Contract Purchase:
- Monthly payments tend to be lower due to the balloon payment at the end
- You have to set a mileage limit at the start and could face mileage or damage charges when the car is handed back
- Flexible repayment terms over 12-48 months
- More choice at the end of your agreement
Personal Contract Hire
Personal Contract Hire or Personal leasing is a long-term vehicle rental. A personal leasing deal is suited to you if you never want to own the vehicle at the end of the agreement. Your payments are determined by mileage, the higher the mileage, the higher the payments and also an initial advance rental payment. You will then pay fixed monthly payments to an agreed term. Service plans and maintenance can also be included in the cost.
Key points to consider about Personal Contract Hire:
- Enables you use of a vehicle which you could not afford to buy or finance
- Excess mileage charges apply if you exceed the agreed limit
- Lease vehicles must be insured by full comprehensive cover
- Drivers don’t need to worry about depreciation as they will never own or sell the vehicle