Purchasing a new car is an exciting endeavour, but the financial aspect often raises questions and concerns. This comprehensive guide will walk you through various financing options, covering loans and car finance deals, helping you make an informed decision tailored to your unique situation.
Let’s get motoring (pun intended).
What is car finance?
Car finance refers to the various methods and financial options available to you, to help you buy a car without paying for it in full upfront. Instead of making a lump sum payment, you can opt for financing, which allows you to spread the cost of the car over a period of time.
With so many finance options available, it’s essential to understand their benefits and drawbacks. Let’s take a look at them.
PCP Finance (Personal Contract Purchase)
Personal contract purchase (PCP) is one of the most popular finance options, as it enables you to keep your monthly payments low and decide if you want to keep the car. Most buyers deposit around 10% of the car’s value and make payments over two to four years.
Your payments will vary depending on how much you plan to use the car, as most dealers set a maximum mileage limit. The total amount you pay won’t cover the full value of the vehicle but instead factors in any depreciation.
Once your term ends, you can return the car or offer a balloon payment to cover the lender’s guaranteed minimum future value (GFV).
However, it’s also possible to find a new PCP deal without buying the car.
PCP Pros:
- People often enjoy lower payments with personal contract purchase agreements, as the dealer will take a lump sum at the end of the deal should you want to keep your car.
- There’s more flexibility with PCP deals because you can choose to keep the vehicle, make a balloon payment, or return it to the dealer.
PCP Cons:
- New cars are expensive, and you might not be able to purchase the car outright.
- Dealers add interest from the balloon payment into your monthly payments – even if you decide not to buy the car.
- There are charges in place if you exceed the agreed yearly mileage allowance.
Hire purchase
Most people choose hire purchase (HP) agreements because they offer more flexibility than other finance options. Instead of entering into an agreement with a dealer, you make monthly repayments to a lender.
With HP deals, the lender pays for the car, and you offer a deposit. Each month, you’ll make repayments until the outstanding finance is settled in full. After this, the finance providers will remove themselves as the legal owner of the vehicle, and you’ll become the registered owner.
Some lenders include regular services and insurance, but it depends on what they’re willing to offer you.
HP Pros:
- There are no restrictions in terms of mileage and usage because you’re contributing monthly payments to own the car.
- Once you make your last repayment, you can keep the vehicle.
- Most HP payments are fixed, so you won’t have to worry about them increasing.
HP Cons:
- HP contracts are a form of secured loan, so you could lose the car if you don’t stick to your repayments.
- You’ll only own the car once you complete the final payment.
- The fixed monthly fees can be high.
Personal loans
Many people prefer to take out a personal loan as they don’t need assets as security. These loans are typically available for amounts between £ 1,000 and £25,000, depending on what the lender is willing to offer based on your credit rating.
As long as you keep up with the monthly payments, you’ll own the car immediately without worrying about losing it. If you have an excellent credit score and a responsible borrowing history, you can get better rates, making unsecured loans a viable solution.
Unsecured Loan Pros:
- You have immediate ownership of the car.
- Personal loans can be flexible in terms of repayment amounts and periods.
- You don’t need to pay a deposit.
Unsecured Loan Cons:
- Personal loans are expensive if you don’t have a good credit score.
- Failing to make your repayments could cause the lender to take legal action.
- These loans last up to five years or sometimes even longer. The car’s value might depreciate significantly during this time.
Credit card purchases
Buying a new car on a credit card is a rare method of financing, but some people use their cards for second-hand vehicles. If you have a healthy limit and can take advantage of 0% purchases, buying the car this way is possible.
However, most credit cards won’t cover the total cost of a car, as the average limit sits around £3000 to £4000. Credit cards can be beneficial if you have savings and need to use your card to pay for any excess.
Credit Card Pros:
- If you have a 0% period, you could save money on interest.
- Credit cards might enable you to avoid going through a finance company.
Credit Card Cons:
- When the 0% fixed period ends, your interest will increase, and the monthly payments might prove too expensive.
- Some car dealers will add extra fees if you put the car on your credit card.
- Most people won’t have a large enough credit limit to put the full vehicle cost on their cards.
Alternatives to car finance
If you don’t like the idea of a personal contract, hire purchase or taking out a personal loan, other avenues are available. However, like car finance options, they have their drawbacks, and knowing them will help you decide which agreement best aligns with your current and future financial status.
Personal car leasing
In many ways, car leasing is similar to a PCP car finance deal, enabling you to pay an initial deposit and make monthly contributions. Once your deal finishes, you’ll need to find a new or used car to replace it, as your lease agreement won’t allow you to buy the car.
It’s like renting a car, but you’ll have it for much longer. Many lenders also include servicing and insurance as part of the deal, making it a convenient option.
Leasing Pros:
- Leasing can be more affordable than other options.
- You can change cars more frequently, giving you more flexibility.
- Some lenders will include insurance and servicing in your monthly payments.
Leasing Cons:
- You must give the car back once the lease agreement is over.
- The dealer might charge a fee if you damage the vehicle or exceed the agreed mileage.
Subscriptions
Car subscriptions are relatively new, and not all dealers offer them. Instead of tying yourself into a lease agreement or financing a car, you can enjoy a new car and pay a monthly subscription for as long as you want.
However, while you’ll have access to new cars, subscriptions are designed to be more of a short-term agreement than a long-term one.
Car Subscription Pros:
- They’re one of the most flexible ways to get a new car.
- Most dealers cover all costs, except for petrol.
- You can switch between different models.
Car Subscription Cons:
- Subscriptions are often a lot more expensive than other financing options.
- They’re not practical for long-term usage.
- Only some manufacturers, including Nissan and Volvo, offer this option.
Choosing the best car finance option
Before deciding, it’s essential to compare car finance deals and evaluate which are best for your finances. While a hire purchase agreement can be beneficial, the monthly payments are also quite high.
Personal contract purchase is cheaper initially, but you will have to pay a set amount if you’d like to own your vehicle at the end of the car finance agreement. Personal loans can be an excellent way to secure a new car, as they offer more control.
By considering your needs and understanding the interest rate on your personal loan, you’ll know which of the different car finance options will benefit you most.
If you’d like some help discussing your options, Believe Money can help. Our dedicated brokers are highly experienced in finding loans for all clients, regardless of their financial state.
Whether you have a poor credit history or want some advice, a free consultation with our team can open new borrowing opportunities and help you secure the car of your dreams. We look forward to hearing from you.