When it comes to buying a car, there are lots of options to help you.
Few of us are able to afford a car outright, which means that most of us have to rely on car finance. There are three types of car finance: hire purchase, personal contract purchase (PCP) or a personal loan.
In this article, we will help you decide which one is the best fit for you.
Key things to know
The Interest Rate – The APR is the interest rate that you’ll pay over the term of the finance agreement. Compare this number between the different payment plans and personal loans that you’re offered. Make sure that you take into account time frames and any other fees.
The Overall Cost – Low monthly payments are tempting, but remember to consider the whole cost. A long repayment term could mean that you’ll be paying more.
Take Your Time. Do your research into the different interest rates and costs that various lenders can offer. Be careful not to over-apply for credit as this could affect your credit score. Don’t rush into making a decision until you know that it’s the right one for you.
Hire purchase
This is a loan secured against the car itself, so you don’t own the car until you’ve finished the payment plan. It can help if you are able to put down a deposit but a deposit is often not required. Whether you have some savings or not, and you’d like a new car that you’ll own at the end of the payment term, then this would be perfect for you.
Personal contract purchase
A PCP deal requires a deposit and monthly payments, usually over three years. At the end of the term, you can choose to do one of three things.
- The first option is to make a “balloon payment” at the end of the three years. This is where you pay off the outstanding amount on the car to own the car outright.
- The second is to give the car back and walk away.
- The third is to use the car as equity for a new deposit and start a new PCP deal.
One of the advantages of PCP deals is that they are tailored to you. The bigger your deposit or the longer the term, the lower the monthly payments will be. However, you’re charged for exceeding your mileage limit and the “balloon payments” tend to be high.
If you can estimate your mileage, and you don’t want to buy the car at the end of the term, PCP could be the best deal for you.
Personal loan
A personal loan isn’t secured against the car; it is based purely on your credit profile. If you have a poor credit score, then you may be able to get a guarantor loan from a broker like motor finance 4u.
The most important thing to consider when you’re looking for car finance is whether you can afford the repayments. Along with this, if you understand the pros and cons of each finance type, then you should be well on your way to a payment plan (and a new car!) that makes you happy.
