Best type of car finance agreement
More people than ever are choosing to fund their next car through car finance but how can you know which car finance agreement is right for you? In the UK there are 3 main type of car financer agreements which tend to be the most popular. However, it’s still a common misconception that car finance is a one size fits all agreement. Depending on your personal circumstances, you may be more suited to one form of finance over others. Our guide below explores the type of car finance available and how you can decide which is best for you.
What is car finance?
Car finance is a way to pay for a car by loaning money to fund the car you want. Car finance agreements can also include leasing and loans in order to get a vehicle. Car finance is usually obtained by borrowing money from a lender or bank to fund the car you want. You will then pay the money back, usually with added interest till the end of the finance term. It’s worth noting here that car finance is never guaranteed, and you may need to pass a credit check or affordability check before you can get accepted. Let’s take a look at the most popular ways to fund your next car purchase.
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Types of car finance:
A personal loan can be one of the most straightforward ways to borrow money for a car. They are usually provided by banks or building societies and can be the most suitable for people with good credit scores. Personal loans can be used to buy new or used cars on finance because the money you apply for will be deposit into your bank account. This means you can buy a car privately or from a car dealer too. Personal loans can be spread over 1-7 years, and you get to own the car from the start of the agreement. This means you can sell it when you want and can make any modifications to the vehicle that you would like.
Hire purchase is a type of secured loan that allows you to spread the cost of the car you want. Hire purchase are usually obtained at a car dealership but can be sorted through car finance brokers too. Monthly payments for hire purchase deals can be a little more expensive than other options as you pay back the cost of the car you want with added interest. This type of finance is secured against the vehicle which means that if you fail to meet your repayments, the lender owns the vehicle throughout and has the right to take the car away from you. This can be a good option for people with bad credit as the lender has more security. Once you’ve made the final repayment there is a small option to purchase fee to pay and you will then become the owner of the car and no more payments will be taken. HP agreements usually last between 1-5 years.
Personal Contract Purchase
Personal Contract Purchase (PCP) is a little more complicated than other options, but you can benefit from lower monthly payments. PCP can be used on both new and used cars and instead of paying off the full amount of the car you want, you cover the cost of the depreciation. Due to this, instead of automatically taking ownership of the car, you have 3 options. You can hand the car back to the dealer and the agreement ends, you can use the value of your current car towards another car on PCP or you can pay the balloon payment and keep the car. Balloon payments tend to be quite large so many people choose to refinance a balloon payment to help spread the cost. PCP agreements usually last between 1-5 years and can be a good option for you if you want more flexibility from your car finance agreement. You will also have to set a mileage limit at the beginning of your agreement and there can be charges applied if you have exceeded the stated mileage. You will also agree to keep the car in good condition throughout the agreement.
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Which car finance agreement is right for you?
A personal loan can be one of the cheapest and most straightforward way to pay for your next vehicle. However, you may struggle to get approved if you have a low credit score. This is because you could be seen as more of a risk to lend to if you’ve had problems making repayments in the past. Hire purchase can be better suited to you if you want to own the car at the end and may have already been declined by other lenders. This is due to the loan being secured against your chosen vehicle and the lender can use it as collateral if you fail to repayments. PCP may be the best option for you if you want to solely focus on low monthly payments and are precious about owning the car.