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04 Jan, 2019


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Car Finance Explained – Complete Guide

Car Finance Explained – Complete Guide

More and more buyers are stepping towards choosing finance to help them fund their dream car. There are different types of finance each with their benefits and drawbacks.

All the types of finance are there to help you drive your dream car without needing a cash lump sum to pay for it upfront. The most well known and popular options o the personal contract purchase (PCP). Although other options such as hire purchase (HP) and leasing are steadily gaining popularity also. Bank loans are also on the table which can cover the cost. Like with any finance package you should carefully consider whether you will be able to afford the repayments. A cash price will always be available for you and might suit the circumstances better.

Personal Contract Purchase (PCP)

Car Finance Explained

So this is the most popular one and allows you to park a new car on your drive in return for a reasonable initial deposit and a series of monthly payments. Although at the end of the agreement you will not own the car but simply hand it back to the dealer provided it is in good condition. Afterwards, you will be offered to buy the car outright at the end of the finance which is sometimes called a balloon payment. This final payment can be financed separately if you can’t afford to pay it in one go.

Well, the price and the amount you pay monthly will depend on the cost of your car, your deposit, interest rate and how much the dealer expects to be able to resell the car when your agreements come to an end. This amount is often known as the Guaranteed minimum future value (GMFV) which is where they expect the car to be valued after your finance period ends.

During the PCP contract, they will usually set out the conditions the dealer expects the car to be in when it returned and the number of miles you will be allowed to cover. Any significant bumps and scrapes beyond usual wear and tear will result in a fine once your contract ends. Take the car back with too many miles in the clock, and you will face a similar penalty. It is crucial to read your agreement thoroughly all the terms will and conditions will be outlined.

Benefits

  • The deposit amount can be flexible
  • You can choose the length of contact usually 24-48 months
  • Monthly payments are more likely to be lower than HP
  • You have no obligation to keep the car at the end
  • You can pay it off early – you’ll have to agree on terms with the dealer

Drawbacks

  • The car still belongs to the dealer after paying all your monthly payments
  • You will have to pay for any excess mileage beyond the contract agreement
  • You will pay for any damage if the car exceeds normal wear and tear

A Hire Purchase (HP)

Car Finance Explained

A Hire Purchase is a finance agreement is similar to taking out a mortgage on a house. Once you’ve paid a deposit aside finance company will loan you the rest of the money for a new car. You will pay this back in monthly instalments over an agreed period.  The monthly payments and deposit size will be determined by the total cost of the car, the interest rate & the length of your contract.

So compared to PCP finance, there will be no large optional final payments because once the agreement is paid off, you will have full ownership of the car. As a result, this means HP contracts do not include any terms and conditions regarding mileage or ordinary wear and tear.

Benefits

  • You will have full ownership by the end of the agreement
  • There are no limitations on mileage and condition
  • You can choose the contract length (12-60 months)

Drawbacks

  • You will not own the car until the final payment
  • These can be more expensive than a traditional bank loan
  • Monthly instalments can be higher than PCP contracts

Bank Loan

Car Finance Explained

A bank loan could be the way to help you get behind the wheel of a new car with possibly fewer strings attached than a PCP or lease deal. That is if you are willing to sort the finance arrangments out yourself. A traditional bank loan could be the way to help you park a brand new car on your driveway without worrying about having to return in several years or limiting your mileage. With a bank loan means you can own the car outright from the start. So this makes it easier to sell as you do not have to leave any finance agreements.

As with other options, you will have to carefully consider whether or not you can afford the monthly repayments before you sign a contract.

Benefits

  • You can easily sell the car whenever you like
  • You will own the car from the start of the contract
  • Competitive fixed interest rates
  • The loan can be dealt over the phone

Drawbacks

  • You need a good credit rating
  • You will have to pay off the interest before you can pay for the car
  • This can affect your ability to borrow any more.
  • Bank loan rates vary – so you will have to shop around for the best deal.

All About Leasing

Car Finance Explained

Leasing is becoming more popular in today’s world. So, Leasing a new car is similar to hiring a car when you go on holiday. You will pay a sum of money upfront then continue with regular monthly instalments then return the car. However, instead of returning the vehicle dirty and full of sand after two weeks. A lease agreement allows you to keep hold of a brand new car for many years, which can be seen effectively as a long-term car rental.  Once your term is complete, you will not own the car and will not be given the option to buy it outright.

You will have to sign an agreement with the company to determine how many miles you can cover and how much your monthly instalments will be.  Similarly, with the other finance options, you will have to pay an upfront fee which tends to be less flexible and is usually calculated as a multiple up to 9 monthly payments. Many leasing businesses will let you add servicing plans to your agreement. With this, it covers effectively all your tyres, services and any other consumables will all be paid for. Adding extra maintenance plans will likely increase your monthly payments.

Benefits

Drawbacks

  • Limited mileage
  • Penalties for excess wear and tear
  • A relatively large deposit
  • You don’t keep the car once the contract ends

 

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