It’s a common misconception that car finance is a one size fits all deal. And whilst it is a simple way to spread the cost of owning a car. There are a few agreement types that you can choose from. Personal Loans, Personal Contract Purchase and Hire purchase are some of the most popular ways to finance a car and each has its own individual structure. The guide below looks at different ways to finance a car and which is best suited to your personal circumstances.
What is car finance?
Car finance is when a trusted lenders gives you money or buys a vehicle on your behalf and you pay the lender back in monthly instalments. Car finance is great for drivers who can’t afford to pay for a car with one lump sum and instead they can usually get a newer, better car than they would with cash and spread the cost. Car finance is subject to status, and you will need to meet the individual lenders criteria first before you can receive an approval. Once you’ve been approved you can choose a loan term length and monthly payment that suit your budget. You can finance both new and used cars and use a number of different agreements to do so.
How does hire purchase work?
One of the most straightforward ways to finance a car is through a secured loan like hire purchase. When you take out hire purchase for a car, the lender doesn’t give you money but instead buys your chosen car from a dealer. You then make monthly payments with interest to cover the cost of your vehicle back to the lender. The lender has the right to take the car off you if you fail to meet the rules of your agreement and miss any payments as they own the car throughout the agreement. Once all payments have been and on time and in full, you can take ownership of the vehicle at the end of the agreed term. There is just a small option to purchase fee to pay, which is usually similar to what you have been paying monthly and then the car is yours to keep.
What is a Personal Contract Purchase?
Another form of secured loan is Personal Contract Purchase deal, but the structure of PCP is much different to HP. Personal loans tend to be a great option for new cars and used cars and those who want to focus on low monthly payments. PCP can offer lower payments because instead of spreading the full value of the car over the term, you finance part of the value. Much of the loan is then differed until a final balloon payment which needs to be paid if you want to take ownership of the vehicle. PCP is one of the most flexible forms of finance and if you don’t want to own the car at the end, you don’t have tp. You can hand the car back to the dealer in good condition and within the agreed mileage and there are no more payments to make.
Should you get a personal loan for a car?
A personal loan is a completely different ballpark entirely and isn’t a form of secured loan. A personal loan is when a bank or building society gives you a required amount of money into your bank account and you can use this money to buy the car you want. You buy the car just like a cash buyer so you can be the automatic owner of the car from the start and can modify and sell the car whenever you want. You then make monthly payments back to the lender to cover the cost of your loan amount until the end of the agreed term. Personal loans may be restrictive for those with bad credit as lenders usually only offer this form of finance to those with good credit scores.