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There are three key types of car finance available:
With an HP, you’ll hire the car from the finance company and pay off its cost (with interest) over a set period. You’ll need to pay a deposit for a hire purchase, typically worth around 10% of the car’s value. Unlike with a personal loan, this debt is secured against the vehicle, which the finance company technically owns until you’ve paid off the balance – plus a small ‘option to purchase’ fee. Because the debt is secured, it’s less risky to the car finance provider than an unsecured loan, meaning that you are less likely to get turned down.
An unsecured personal loan is probably the most straightforward way of financing a car purchase. Quite simply, you borrow the money to buy the car and pay it back, with interest, over a set period – typically 1-5 years. Since you use this money to buy the car yourself, you’ll own it outright from the day of purchase.
Like with an HP, a personal contract purchase involves you paying an initial deposit, and then regular monthly instalments for a set period. But instead of paying off the cost of the car, with a PCP you’re just paying the depreciation – the difference between what the car is worth at the start of the contract and at the end. Once the contract is up, you’ll have the option to make what’s known as a ‘balloon payment’ to buy the car outright. It’s usually pretty expensive to buy the car at the end of the PCP either just return it or start a new PCP and get a different car.
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The majority of people in the UK use some sort of car finance deal to buy their cars these days, but is it worth it? Using car finance to purchase a new vehicle can be a great way to get the car you want without stumping up the cash upfront. However, there are certain things to be aware of before you take out a car finance deal.
After buying a house, purchasing a car is one of the biggest expenditures most of us will make in our lives. Therefore, it's important to know exactly what you're getting into before getting into the details of a car finance plan.
Financing a car works similarly to taking out a secured loan. Pretty much any car finance deal will involve you paying monthly installments to your lender. While this can spread the initial cost of a new car over a number of years, you need to make sure your monthly repayments are affordable.
If you miss a payment, you could be hit with late payment fees and other charges which will only increase your debt. Missing payments can also negatively affect your credit score. Bad credit can affect your ability to take out loans in the future, including other car finance deals and mortgages. Your car may also be repossessed, meaning all that money you've paid towards it will count for nothing.
This will depend on what you mean by ‘cheapest’. With a PCP you’re only paying for the depreciation and not the car itself. This means that you’ll pay less overall than you would with a hire purchase (assuming that the car costs the same amount). However, you won’t end up with a car at the end, unless you pay the balloon payment which is likely to spike the cost right up.
With both PCPs and hire purchases, you’ll have to pay a deposit. This will typically be around 10% of the vehicle cost but if can opt to pay more you’ll reduce your monthly payments. Personal loans won’t require a deposit.
Interest rates (or APR), tend to be broadly similar across all products – around 4-7% is typical – and will depend in part on your credit score.
Your credit rating will determine things like the APR of your loan and even whether or not you’re accepted in the first place. Although it’s unlikely you’ll be turned down entirely for having bad credit, it’s even less likely with PCPs or HPs as both are effectively secured loans. This means that if you default on payments, the car finance company will repossess the vehicle.
When the term of your personal contract purchase is up, you’ll have to hand the car back in the same condition you go it in or pay for any damage. You’ll also have to agree to a monthly or yearly mileage limit when you start your PCP and breaching it will jack up your monthly payments.
If you can’t keep up with your payments on a hire purchase or personal contract purchase agreement and have to default, then the car will be repossessed. If you default on a personal car loan, however, you’ll have to either try and arrange a debt management plan or declare insolvency with an IVA or bankruptcy agreement.
ME Expert Ltd is not authorised to provide advice and are introducing you to a regulated firm with whom we are not under a contractual obligation to conduct mortgage or general insurance mediation business with exclusively. You should ensure you provide any potential insurer with your full details and ensure that you are eligible to make a claim(s) in relation to the cover offered. ME Expert Ltd will receive a small payment for certain general insurance introductions which will not normally exceed £35. ME Expert Ltd does not give advice on or recommend any particular insurance product or service or whether it is suitable for your personal circumstances. The information provided is to help you to make your own choice about how to proceed.