Don’t Get Left Out of Pocket – Car Finance Questions Answered



Of all the things you buy during your lifetime, cars are among your most expensive single-item purchases. Next to your house, it’s usually your car costing most, so you naturally want to strike a good deal when buying. Of course the price you pay is an important consideration; you don’t want to leave money on the table, overpaying for a car that’s cheaper elsewhere. But finance is also important, because taking out the wrong loan can be an expensive misstep, resulting in high interest charges and costly finance fees.

Finance Options for Car Buyers

Car finance is secured against the vehicle you’re purchasing, allowing you to make periodic payments until you’ve covered the entire cost of the car. This type of credit arrangement is relatively straightforward, establishing a certain number of months for repayment. Like other instalment loans, car finance gives you all the information you need up front, so you know exactly when and what is owed.

Unlike short-term loans secured by your pending paycheck, which are quickly repaid, car finance repayment stretches out over time, allowing months or years to wipe away the debt. Failing to make timely payments may result in losing the car and/or poor credit reporting. You have a few finances options when buying a car.

Hire-Purchase

A hire purchase (HP) credit arrangement starts with a deposit when you select a car, followed by a set number of fixed monthly payments. Under the terms of a hire-purchase agreement, the lender owns the car until you’ve made the final payment. Some HP agreements also have a voluntary payment included at the end of the term, called an option to purchase fee. Paying it ensures the car is yours, free and clear of further encumbrances.

Personal Contract Purchase

Similar in some ways to a hire-purchase arrangement, a personal contract purchase (PCP) requires an up-front deposit, followed by instalment payments, typically made over the course of one to four years. At the end of the payment term, the borrower has multiple options. If you utilise this form of finance you can trade the car in for an upgrade, keep it as your personal car, or return it to the dealer.

In order to keep a car financed through a PCP, you must first make a final balloon payment, reflecting the terms of the original deal you made upon purchase. The amount of the balloon payment is established according to the guaranteed future value (GFV) of the car, which is set when you buy it. If you instead decide to trade the car for an upgrade, GFV equity, such as the difference between actual and predicted mileage may be applied toward a deposit on a new car.

Personal Leasing

Also known as contract hire, personal leasing resembles personal contract purchase in some ways. In stark contrast, however, choosing a personal lease over other types of finance means you’ll never actually own the car, under the terms of the agreement. In that way, it’s more like renting a car for a set period of time, while making payments, and then giving the car back when the contract expires.

Who Benefits From Car Finance?

Once viewed as the best car buying option for those without enough cash on hand to pay the full purchase price, all at once; car finance is now thought of as a prudent approach for almost all buyers. Whereas finance remains popular for new car buys, it is also becoming more common for used car buyers to enter into car finance arrangements.

If you’re at least 18 years old and have a permanent UK address, applying for car finance is as easy as filling in a few personal details. Take care not to submit too many applications in a short span of time, or the inquiries may have a negative effect on your credit score. Once approved, you’re eligible to join millions of fellow Britons, utilising car finance to close on your next motor purchase.

Paul graduated in 2001 with a degree in Finance. Since then he has gone on to work for several of the UK's most well-known financial institutions.

An avid blogger and a huge football fan, Paul is here to guide you through the ins and outs of personal finance and perhaps save you some money in the process!

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