Car finance basically refers to the many different financial products that enable an individual to obtain a used or new car, such as loans and leasing. The car finance sector in the UK is estimated to be worth billions of pounds each year, with new cars out selling the existing fleet of cars more than ever before. As a result, the number of people dealing in car finance has increased dramatically in recent years, with a huge number of companies now supplying loans for a wide range of requirements.
There are four types of car finance – personal loan, car hire purchase, Personal contract purchase (or PCP) and leasing.
Personal Loan car finance
Buying a car with a personal loan is pretty much what it says. You see a car that you like. It could be new or second hand. It could be from a private individual or a dealership. You negotiate the price then go to a bank or any other finance house and arrange a personal loan to buy the car. The loan, together with interest, is then paid off over an agreed period. Typically over a period of between 3 and five years.
Hire purchase contract
When it comes to car finance, a higher purchase agreement and personal loan are very similar. The difference is that a higher purchase is often from the dealership or from a finance company. You would borrow the money you need to buy the car from the dealership or finance house and agree to pay it off, with interest, by monthly instalment over an agreed period of time. At the end of that period you would have paid all that money off and the car is yours. The only difference is that with a higher purchase the loan is secured against the car. This is similar to the personal loan car finance above except that if you don’t keep up with the repayment the dealer or finance company can come and take the car and sell it in order to get their money back.
Personal contract purchase
Another option is to take out a personal contract purchase. Here, instead of paying off the full price of the car over a given period of time, You just pay the difference between the cash price and what they think the cars will be worth in three or four years time. They decide that value at the end, by how many miles you’re going to be doing a year and roughly how long you want the car and then they decide that’s what you pay. So why is it PCP so popular today? Well, you often put in a small deposit, you don’t pay as much a month than a personal loan or a higher purchase, and you have multiple options at the end of it.
You can pay what they say the car is worth and then own the car. You can also give the car back and walk away with nothing more to pay. As you haven’t gone over your mileage you said you would and the car’s not falling apart, you can trade that car in for another one. So you use that car towards your new deposit, for example.
Leasing Car finance or Personal Contract hire
Leasing is another good car finance option. It is considered to be the most cost-effective way to finance a car due to the fact that the leasing company can reclaim VAT on the cost of new cars which can enable it to lower the leasing costs.
Leasing or personal contract hire (PCP) is similar to Personal contract purchase (PCP) except for 3 differences. First is your monthly repayments. You pay like a PCP, but your payments include servicing and the maintenance costs at the beginning. Secondly, the deposit you have to put down is larger. Thirdly you have to give the car back at the end of your contract period.
The advantage of the PCP method is that so often the cost is slightly lower because the lessor can claim the VAT back on the car. In most cases they include the service and car maintenance. It’s a fixed term. Better still, you don’t have to worry about depreciation.
On the downside side, you are not allowed to keep the car at the end of your contract. It’s pretty tricky to get out of the contract. There are mileage charges if you go over the agreed mileage when you signed the contract.
Car dealers often offer car finance at very attractive rates, but you need to be aware that these rates do not always reflect the true cost of borrowing. Some dealers may offer a car finance contract at a cheaper rate than a bank, but the savings may be eroded when adding points to the price. There are also costs involved in making the repayments and these can vary depending on the contract, the type of vehicle being bought, and the APR of the loan. Whichever route you take, it’s essential that you read the terms and conditions of the car loan and check to see how much extra interest is added on top of what you’re paying if you go for the dealer finance option.
When deciding on which finance company to use, consumers need to make sure they choose one that will provide them with the best deal. For instance, if a consumer is looking to purchase a used or new car, but needs to borrow a substantial amount of money in order to do so, then a dealership loan or finance arrangement could be the best choice. These types of financing options are often provided by the same dealer or lending institution that supplies vehicle finance, meaning that the consumer will not have to search out a separate lender when making the purchase. A dealership financing agreement is also a good option for those who are looking to purchase a second hand vehicle.
Many consumers are wary of dealership finance because they worry that a dealership will try to sell a used car at a much higher price than its market value. However, the majority of dealers are legitimate and will not try to take advantage of consumers by overpricing the car. Instead, these dealers work with a number of different finance companies who supply them with the money they need to buy the car. The dealer is not the middleman; rather he acts as a link between the loan provider and the borrower.
When applying for car finance, the borrower must give some important information about themselves. These include their occupation, the details of any other existing loans they may have, details of their annual income and details of any other assets they may have. The details that are most useful to potential lenders are the details of the incomes, the total value of any existing possessions and the credit rating of the borrower. These details will ensure that no bad credit individual can apply for car financing, ensuring that only the most reliable customers are being given the opportunity to fund their new car purchases.
Car finance companies will review the borrower’s application to see whether they fit within their pre-approved finance offers. If the offer is acceptable to both parties, the loan terms will be discussed and then finalised.
This is where the interest rate for the new loan will be determined. The interest rate will be based on the current borrowing costs of the vehicle as well as how much the car is worth and the amount of time it will take to pay off the loan. The repayment terms will depend on the lender and how long the borrower wishes to repay the loan. Monthly payments will be agreed between the lender and the borrower and the cost of the borrowing will vary between lenders.