Most people don’t just have £15,000 lying around the house to pick up and go pay for a car. The good news is that there is an entire system of financing built around making sure people can get the vehicles they need. This is crucial because obviously people need transportation but while many people understand there is a finance system in place, they don’t understand how it works.
If you want to get the best terms and the best possible payment plans then you will want to understand more thoroughly how car finance works. This article is going to dive into the world of car finance and help explain it so you’ll know how car finance works inside and out and be prepared when it comes time to work out a deal.
The Very Basics
Right off the it is important to understand that “car finance” is a really general term that refers to any payment plan for a vehicle where you make payments over an agreed upon time, schedule, and amount depending on how much is paid up front and how much is owed.
There are many specific types of payment plans, and that’s where the details really come into play. You want to make sure you take the time to learn the difference between a PCP, a hire purchase, a secure or unsecured loan, and more. These terms might all be related to car finance loans but they mean very different things when it comes to long-term cost and payment.
To help give you this education we’re going to focus on the most popular current options and give a quick but detailed run-down of each.
So prepare to learn about:
- Guarantor loan
- Hire purchase (HP)
- Personal contract purchase (PCP)
- Personal loan
Note: We are reviewing these in alphabetical order and not necessarily in the order of popularity or from best to worst.
So just what is a car guarantor loan?
This refers to a loan that has a backer. In other words, someone agrees to pick up the monthly costs if you fail to make payments. This isn’t an overly common loan type for financing a car however if the person trying to buy has a really incredibly bad credit rating and poor credit history then this can be an option.
That way the seller is still protected if the buyer fails to make payments, as his or her history indicates could be likely. At that point the third party guarantor (usually a parent, relative, or friend) is legally responsible for picking up the payments.
- Good option for people with terrible credit
- Can be used to rebuild credit score (assuming you make full payments on time)
- The payment amount and schedule is set in stone
- The APR will be higher making this loan more expensive
- You need to have someone willing to back you and it can hurt the relationship if they are forced to take up your payments
- In many cases the guarantor must own a home or other major property that could become collateral
So just what is an HP (car hire purchase)?
A Hire Purchase (commonly referred to as an HP) is actually the most common form of car finance. This is an arrangement that means you are “hiring” the car from the lender until it’s fully paid for. This can involve a down payment or deposit (although not all of them do) but then it lays out a specific payment plan.
That plan will have the total loan principal, the interest rate, the monthly payments, and a calendar showing how long you would need to make those payments for until the car would be 100% legally owned by you.
This is basically what most people think of when they think of a car loan or a leasing agreement. This is what allows the dealership to take the car back if you fail to make payments because in the agreement you don’t fully own it until the very last payment is made.
These are pretty standard plans and one of the benefits of an HP agreement is the fact that you actually do have the option to fully repay the loan early for a flat settlement amount from the lender. So if fortune smiles on you, you get a bonus, or just save and budget well, it is fully possible to settle up and then you own the car and don’t have to worry about any more payments.
- No mileage restrictions of any kind
- There’s no large lump sum payment due at any time
- Often has lower interest rates than other car financing plans
- Great way to rebuild credit if yours is iffy
- Once half the loan is paid back you can invoke “Voluntary Termination” and hand the car back instead of completing the contract (most offer this term but as always make sure it is in the one you are signing if that’s something you want)
- If the agreement is short term it can be rather expensive
- Miss a payment, the vehicle can (and likely will) be repossessed since the car is the collateral
Looking at “car leasing” as an option
Leasing is quite different from the other options on this list, but it is a viable way to finance a vehicle in some situations. This is more common with business contracts than personal ones, but basically as opposed to financing to buy leasing is financing as a long-term rental.
Generally speaking you would pay 3 months’ up front, then there are monthly payments over either 2 or 3 years in most cases. At the end of the agreement the car is given back to the dealership and generally a new car and new contract must be signed at that point.
As mentioned a bit before, there are two types of leases:
- Personal contract hire (PCH)
- Business contract hire (BCH)
Each one involves leasing the car and not purchasing it. Both have their advantages and various pros and cons although one of the benefits of a BCH is that the business can claim depreciation (VAT tax exemption) on the rental to save on their tax bill, making it a better deal than it might seem at first glance.
Finally the leased care will be fully inspected upon return to check for damage, mileage, maintenance and more. Expect some type of service charge upon the return of the vehicle.
- New car every few years
- Depreciation of value isn’t your problem
- The manufacturer’s warranty is almost always in effect
- You will need very good or excellent credit rating
- Extra charges upon return for mileage, maintenance, etc.
- You don’t actually own anything
- You are tied to the car & lease cancellations are often 50% of what is left
- No care modifications
Just what is a car PCP (personal contract purchase)?
A PCP is going to look relatively familiar in part because it is very similar to the popular HP agreements in many ways. First of all these are similar in the basic structure since it starts with a deposit followed by monthly payments over a set amount of time. In the case of the average PCP that time will be 2-3 years (24-36 months).
The difference comes at the end of the term. At that point there are options. One is to hand the car back, similar to a lease. Then there are no more payments and no worries. On the other hand, if you want to keep the vehicle that is absolutely an option however the payments will balloon. The earlier payments still count towards ownership, but the ballooning payments will normally be considerably more than before.
If handed back, then just like a lease mileage and wear & tear will become an issue once again. Check any contract to know the specifics as these can vary greatly between dealerships.
- More flexibility than other agreements
- Monthly payments are lower though there tend to be lump sums due at the end agreement or payments do balloon if you keep it
- The fixed cost is a nice feature for budgeting
- There are charges upon returning the car
- If you keep the car the balloon payments will be considerably larger
- You will need to pay some additional interest payments regardless if you give the car back or not
Just what is personal loan car financing option?
Most people are more than plenty of aware of what a personal loan is, but they may not have thought about it in the context of purchasing a vehicle. Also commonly referred to as an “unsecured loan” this is a direct loan with no collateral that allows you to borrow money to purchase the car. The understanding comes with a payment plan and the loan is actually not secured by the car meaning you can actually sell the vehicle before the loan gets paid off if you get a good deal on it.
The other financing options on here mentioned do not give you that specific freedom.
- Better negotiating position for total vehicle cost
- Since the loan is unsecure the car can not be repossessed
- You can sell the car at anytime
- Fixed interest rates
- A personal loan can be used to buy from any dealer or seller
- You need a pretty good credit score
- Most unsecured loans have a top end limit
- Personal loans mean doing your own homework, while PCP & HP agreements usually have a dealership doing background checks and homework for you
Plenty Of Options
As you can see when it comes to financing a vehicle there are actually quite a few option available. Whether you’re renting for a few years, need small standard payments up front, have good credit or bad, you actually have quite a few options available.
The key here is understanding what your specific needs are, what limitations you may have (such as credit history concern), and doing your research to figure out which option is going to end up being the best for your specific needs.
All of these financing options have the ability to improve your credit history if you see them through or hurt your credit score if you fail to keep up with payments. Because of that it is very important to pick out a practical plan for your vehicle and not go with an overly optimistic one that may or may not work out.
Are there other finance options?
The five that were listed are common options and generally really cover almost every potential lending situation. Generally one of these will do the trick and when individuals apply for financing they are likely to be recommended one of these options.
You may have a couple to choose from or you may find yourself needing to agree to just one that you qualify for but whatever the options available most dealerships will work with you to try and find a solution that works for everyone involved.
Do You Need To Agree Blind?
No, don’t ever agree to terms without reading them or getting exact numbers in writing. Any contract should be in writing, in the open, and you’ll always get to review the terms and make sure you understand them before ever signing and agreement.
This is just common sense regardless of credit history and if you find some lender trying to push the paperwork through aggressively then it’s time to run. Professionals go over the financial approval in detail and then they help you get your car.
So now that you have all the knowledge you need, what are you waiting for? Contact us today and let’s get you financed so you can get on the road.