Buying a car is a long-term investment as it’s an asset. Many people wrongly assume that they need to save enough before they can afford to buy their own car. The fact, however, is that more and more people prefer to finance their car by credit. You can bring home a car without buying it outright. Widely recognized and popular car finance options like Personal Contract Purchase (PCP), Hire Purchase (HP), Leasing and Bank Loan let you achieve this. Sometimes, depending on your financial circumstances, taking a car finance may not be the best thing to do. You should understand the different types in detail before making a decision.
Personal Contract Purchase
What Is It?
The first and most popular car finance option is Personal Contract Purchase. The abbreviation for it is PCP. You can choose any car you like and start driving it. A car dealer will usually ask for an initial deposit amount as security for the car. This can be anywhere from 10% to 20% of the value of the car. For example, if your car costs £50,000, a 10% deposit will amount to £5,000. Note that you’ll have to pay this deposit from your own savings.
How Does It Guarantee Flexibility?
Personal Contract Purchase gives you the freedom and flexibility you desire. At the end of the Contract Agreement, there is no obligation on you to buy the car. You may return the car if it’s in good condition. Or you may even buy it after making a balloon payment. A balloon payment covers the unpaid price of the car. Another option is to buy the car at resale value and sell it to buy a new car.
How Does PCP Car Finance Work?
As with any other kind of loan, your credit score matters. Those with a good credit score are likely to get the best deals. The rest can only hope that they get lucky. However, some lenders know that bad credit is not forever and don’t consider it much. The lender won’t check your affordability- you’ve to do it yourself. First, you make a 10% deposit and then a series of monthly payments. You also have to use the car in a careful manner as fines may apply for excessive wear and tear. Sticking to mileage limits can prevent you from paying extra charges. At the end of the contract, you just return the car and don’t pay even a penny after that.
What Are the Upsides and Downsides of PCP Car Finance?
- Lower monthly payments as compared to Hire Purchase car finance
- Deposit amount is negotiable
- Flexibility of contract term (usually 24-48 months)
- No obligation to buy the car on expiry of contract
- Early repayment is possible
- Even after monthly payments, you get no ownership of the car
- You have to pay for excess mileage
- Penalty for wear and tear beyond normal
What Is It?
The second car finance option is Hire Purchase, short for HP. You should go for HP only if you are a hundred per cent sure that you want to buy the car. HP is just like a mortgage for your house. You pay an initial deposit and borrow the rest to buy the car. You then pay off the car loan in small instalments.
How Does HP Car Finance Work?
You usually pay around 10% of the value of the car from your own pocket. A finance company can then lend you 90% provided the car itself is the collateral. So it’s a loan against your car. In case you fail to make repayments, you can lose your car. But if you manage to keep up until the last instalment, the car will be yours. Note that there’s no option of returning the car at the end of the agreement. It’s a long-term commitment you take on.
What are the Upsides and Downsides of HP Car Finance?
- The car is yours at the end of the agreement
- The car loan term is longer (usually upto 60 months)
- No fine for wear and tear
- No mileage restrictions
- You don’t get ownership of the car during the loan term
- May be more expensive than a bank loan
- Monthly payments are higher than PCP finance
Leasing (Personal Contract Hire)
What Is It?
Leasing is the third form of car finance. In this, there is no talk about buying the car. You just borrow a car on lease. It’s similar to renting a car while on a holiday. At the end of the agreement, you can neither buy the car nor will you have any ownership right on it. It’s a long-term rental.
How Does Leasing Work?
Like the other forms of car finance, you’ll have to pay a deposit but this is less flexible. Your deposit is likely to be calculated as a multiple of three, six or nine monthly payments. The contract agreement will state how much you need to pay monthly and how many miles you can cover. A Personal Contract Hire or Leasing already includes servicing costs and car tax, so you have to only worry about refueling the tank.
What are the Upsides and Downsides of Leasing Car Finance?
- Fixed-cost motoring
- You don’t own the asset so no worries about depreciation
- Maintenance payments may burn a hole in your pocket
- You can’t keep the car even if you want to
- The deposit is relatively large
- Mileage is limited
- Penalty for excessive wear and tear
A bank loan is a traditional form of car finance. You can borrow long term loans for bad credit as well if you want to buy a new car. With a bank loan, you can park a car in your driveway without worrying about limiting your mileage or returning it. It comes with fewer strings attached than PCP or leasing. You own the car outright so you can easily sell it to repay the loan in case the worst happens. Consider your incomes before signing a contract.
What are the Upsides and Downsides of Bank Loan Car Finance?
- You own the car outright
- You can get competitive fixed interest rates
- A bank loan is easy to arrange over the phone
- You can sell the car if you no longer need it
- It can affect your ability to borrow more
- A good credit rating gets you a good deal
- You often have to pay off interest first
- Bank loan rates vary
Choosing from the available types of car finance can be tricky. But once you know how each one works, you’ll find that it’s actually very simple.
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