Which Car Finance Option is Best for You?

Despite the dizzying amounts of jargon, small print and footnotes, getting your head around car finance isn’t as challenging as you might think! 

Today, car loans are the most popular way to buy a new or used vehicle. Combined with the fixed low payments, you can expect flexible terms from loans such as PCP and Hire Purchase to suit your circumstances. You can tailor your monthly payments by adjusting your deposit and contract length. 

But which car finance option is best for you? We’ve cut through the jargon and rounded up the most popular types of car loans to make your choice easier: 

Hire Purchase (HP) 

If you want to buy a car outright but don’t want to splurge all your cash in one go, hire purchase may well be the finance deal you need. Unlike Personal Contract Purchase (PCP), there is no final large payment to worry about. 

Whichever vehicle you choose, the entire cost of the car is split across a deposit (typically 10%) followed by a series of low fixed monthly payments. Usually, this is spread over two to five years. 

The vehicle is automatically yours once your contract is finished and you’ve paid your final instalment. 

Positives of HP: 

• The entire car cost is spread across monthly payments 
• Lower interest than PCP equivalent 
• Available on new or used cars 
• No final large payment 

Negatives of HP: 

• The vehicle isn’t yours until the final payment made
• Monthly payments are typically higher than PCP 
• Higher monthly instalments could potentially limit your choices
• Depreciation of vehicle may impact selling power 

Personal Contract Purchase (PCP)

PCP is one of the most popular types of car financing due to how flexible and affordable it is. Unlike HP, you can expect lower monthly payments despite the same deposit and contract length. 

PCP uses the vehicle’s guaranteed minimum future value (GMFV) to determine how much the car’s value is expected to lose throughout your contract, rather than the total upfront cost. 

Once your contract is complete, you can either return the car with no strings attached (as long as you have stuck to your agreed mileage limit and the vehicle is in good condition). Or you can choose to pay a “balloon payment” – a pre-agreed lump sum to buy it. 

If you don’t have the funds to cover the final lump sum, you can refinance the vehicle or use the equity against a new car. The more equity you have, the lower the monthly payments will be on your next purchase. 

Bear in mind – if you are partway through a contract and the vehicle has negative equity, you’d still have to settle the remaining amount. Or pay extra if you are planning on trading in the car. 

Positives of PCP: 

• A flexible and affordable form of finance 
• Your contract covers the GMFV, so you pay less than other car loans overall 
• You can hand the car back with no strings attached
• If you have positive equity, you can use this towards a new vehicle at the end of your contract 

Negative of PCP: 

• Negative equity will result in you having to cover remaining costs if you choose to trade-in or are part way through your contract 
• Large final payment 
• Going above your agreed mileage limits will cost you extra 

Leasing 

While leasing is technically not the same as car finance, it’s an excellent option for anyone looking for a new car without having to own it. Think long-term car rental, and you’ve hit the mark! 

Unlike PCP or HP, leasing is typically only available on brand-new vehicles. Monthly payments are relatively low when compared to the value of the car, but your initial deposit could be up to three months of rental in advance. 

There is no option to buy the vehicle at the end of your contract, so you must stick to your agreed mileage limits and keep the car in top-notch condition. 

Positives of leasing: 

• Large initial deposit (usually three months rental in advance) 
• Perfect if you like to switch your vehicle regularly 
• Relatively low monthly payments 

Negatives of leasing: 

• Only available on brand new cars 
• No option to buy 
• Strict mileage limits 

“Bad credit” car finance 

Lenders favour good or excellent credit scores due to their “creditworthiness.” In contrast, if you have a poor or limited credit history, you are less likely to get accepted as there is little proof that you can make your payments back on time and in full. 

 Bad credit car finance is designed to get you behind the wheel despite your previous credit history. Specialist lenders will look at your individual circumstances and work with you to find you the best deal to rebuild your credit score and get you on the road. 

If you have a CCJ, IVA, bankruptcy, default or are self-employed, this is the best car finance option for you. 

0% APR deals 

If you’re not bothered about what car you end up with and simply want a no-nonsense car finance package, then a 0% APR deal might be best for you. 

Typically, 0% deals are available on brand new cars that the dealer can’t shift or an end-of-line model. But, there is a catch. While no interest is attached, the vehicle will likely be more expensive than a PCP or HP deal. You could also miss out on other discounts available from other finance deals. 

Make sure you check out and compare other finance deals before committing to a 0% deal. It could save you money in the long run. 

Positives for 0% deals: 

• Interest-free credit option 
• 0% deposits available 
• Could save you money on the forecourt

Negatives for 0% deals: 

• Works out more expensive than most other finance deals 
• If you miss a payment, you could be switched to a high APR scheme 
• Miss out on other discounts 
• Not as good value as other deals 

Car finance opens up a whole world of possibilities that cash alone won’t get you. With flexible and affordable options to choose from, there is a perfect car loan for everyone’s set of circumstances! Which one will you go for?

danielle

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