A car purchase isn’t something you take lightly. There are a variety of options, right from purchasing it outright to getting financing. Moreover, you need to take the running costs into consideration. Most people would say that a car is the second most expensive purchase after a home. That’s why you need to identify the best possible way to purchase the car of your dreams.
If you are looking for financing, you have five main options: hire purchase, a personal contract plan, personal leasing, a personal loan, or cash. There are plenty of options to choose from, and it may seem daunting at first, so make sure you understand where you’re getting involved.
In this article, we’ve simplified the concept of car finance for you. Read on to find out the right financing option for you.
Personal Loan for car financing
Personal loans don’t have to be restricted to car purchases since you can spend the money at your discretion. But, it is one of the most popular ways to purchase a car – especially since it means you own the car instantaneously.
Unlike HP or PCP loans, the loan will not be secured against the vehicle you buy, meaning you can repay it over a longer period (generally one to seven years). It can be painful to have to repay a loan for longer than you keep your car – which is why you should give it sincere thought.
With a personal loan, you’ll not need a down payment and will be able to deal directly with your lender instead of going through a dealer.
Personal Contract Purchase (PCP)
Auto buyers are increasingly choosing PCP plans because they tend to have lower payments than a personal loan or an HP plan.
In other words, you won’t pay off the entire value of the car, so you’ll have a lower rate. Your purchase price is reduced – and you pay part of the overall cost at the end of the term. PCP plans do not provide ownership of the vehicle, which means you can change your mind after the contract ends, usually after one to four years. Upon paying off the final ‘bubble’ payment, you can take full ownership of the vehicle or return it to the dealer.
Alternatively, at the end of a PCP plan, you can upgrade your car. Upgrade to a new vehicle and continue your monthly payment as before.
Due to PCPs basing their rates on knowing the value of the car when the agreement ends, you will be restricted to driving the car for a set number of miles. Additionally, you must maintain a high standard of vehicle maintenance. You will also usually need to put down a deposit when you begin your PCP plan, though companies can adjust this to fit the varying budgets of consumers.
Hire Purchase (HP)
HP plans often go by the name ‘traditional finance’ since the concept is fairly straightforward. Herein, instead of paying the dealership directly for your car, a finance company will handle the payment. Contractually, you agree to repay the money to them every month at a certain interest rate. The repayment period typically lasts between one to five years.
An HP deal will, in most cases, require a deposit – although it’s subject to your circumstances, the car you’re buying, and the payment term you’re choosing. You will not own the vehicle until the HP contract is over. However, since you legally are paying off the entire cost, you won’t be expected to adhere to mileage restrictions or to maintain the car in an immaculate condition.
Personal Contract Hire (PCH)
Personal Contract Hire is, in many ways, similar to renting a car for a few days. However, it’s for a much longer period. In this case, you will not own the car, nor will you have the option of buying it – you will have to return it towards the end of your PCH term.
The length of a PCH plan can range from one to five years. The only catch here is that you will need to keep the car well maintained since you’re effectively paying for depreciation over time. Furthermore, if you exceed the total miles you have agreed to during the term, you might end up paying a large penalty at its conclusion.
A contract hire plan typically requires a deposit – the bigger the deposit, the smaller will be your monthly repayments.
You might think that buying a car with all or part of your funds in cash is a simpler solution, but it will limit your options. You will own the car outright if you pay the full price in cash. With no monthly loan payments or financing agreement terms and conditions to worry about, it’s stress-free.
During the term of a personal contract purchase (PCP) or personal contract hire (PCH), the car belongs to the creditor. In such cases, you won’t be able to sell your car until the end of the repayment term. Plus, if you fall behind with your payments, you stand the risk of losing your car.
However, exhausting all your savings on purchasing your car may not be the smartest financial move in the long run.
Secured Vs unsecured car financing
HP, PCH, or PCP agreements are secured by the car as the asset for which the financing is guaranteed. The company will repossess the vehicle before selling it to pay off the loan if you do not make your payments.
On the other hand, you won’t have to pledge your car as collateral in personal loans because personal loans don’t require collateral security. While you don’t stand the risk of losing your vehicle in the event of a default, you may still jeopardise your finances.
Defaulting leaves an imprint on your credit file for 6 years, hampering your chances of securing credit in the future. Therefore, regardless of the financing method you choose for your car purchase, it is vital to make timely repayments.
Since getting into a financial agreement on a car is a big commitment, it makes sense to run thorough research. You can find a good loan deal by using an online comparison site such as Loan Broker.
Loan Broker is an FCA-approved credit broker in the UK. Compare personalised offers with real interest rates on Loan Broker to find your ideal personal loan at the tap of a button!