Car Finance Explained: The good, the bad & the ugly

You may be looking to get a new car, but aren’t quite sure of the best financial route to take? Perhaps you’re not sure what options there are other than outright buying or renting. Well, today we will explore the various types of finance options available to you, as well as a deep dive into car finance explained, and which car finance is best for you and your circumstances.  

The different types of car finance explained 

Personal Contract Purchase  

A Personal contract purchase (PCP) is a finance agreement, most suited for private individuals, somewhat similar to a hire purchase. With PCP you pay a fixed monthly rate between 2 to 5 years, this is with an APR (Annual Percentage Rate) rate of 5.5% – however, this can vary.  

Once you have made your final payment there are 3 options for what you can do next: 

  1. Return the vehicle with nothing more to pay, as long as you’ve kept within the agreed mileage and the conditions of the car are adequate according to BVRLA’s Fair Wear and Tear Guide 
  1. Part exchange the vehicle and use any equity left towards the deposit of your next car 
  1. Buy the vehicle at the price agreed upon at the beginning of the agreement (Minimum Guaranteed Future Value)

The good? 

  • Easy budgeting with fixed monthly payments 
  • Option to purchase if you want 
  • Can part exchange the vehicle and use the money towards your next car 
  • Vehicle Excise Duty is included within the first year 
  • Servicing can be included 

The bad? 

  • If mileage has gone over fees are incurred 
  • Can be more expensive than Personal Contract Hire 

The ugly? 

  • If the car is handed back exceeding the mileage or in poor condition and does not stick within fair wear and tear guidelines, you will be charged an excess fee. 
  • After the first year, the lessee is responsible for Vehicle Excise Duty payments (which can increase over the agreement) 

So, as you can see, there are a lot more good than bad and uglies around a PCP agreement. But remember, it’s only worth using this agreement to get the vehicle you desire to have if it’s the right finance scheme for you and your needs.  

Hire Purchase  

Hire purchase (HP) is a finance agreement where you pay fixed monthly payments for 2 to 5 years, once you have made the final payment you will then have the option to officially own the vehicle outright. To own this officially, you must pay an option-to-purchase fee. Note: you do not own the vehicle until the final payment has been made.  

The good? 

  • Easy budgeting with fixed monthly payments 
  • You own the vehicle at the end of the agreement 

The bad? 

  • You do not own the vehicle until the final payment is made 
  • You cannot sell the vehicle without the finance house’s permission or until the final payment has been made on the agreement 

The ugly? 

  • If a payment is missed the car can be repossessed 

It’s useful to think of this agreement as more of a loan you’re paying back, rather than renting a car for that time period. 

Contract Purchase 

Contract purchase (CP) is perfect for business owners looking to lease a car between 2 to 5 years. You simply make monthly payments throughout the contract and at the end of the agreement you can either sell, buy or return the vehicle.  

The good? 

  • Affordable payments due to the balloon at the end of the agreement 
  • Should you wish to claim full ownership of the vehicle, you can do so at the end of the agreement for an option to purchase fee (usually around £10) 
  • The price of purchase is agreed upon at the start of the contract, so you can budget in advance for this 
  • Flexible options at the end of the agreement as you have the choice to return, part-exchange, or buy the vehicle 
  • The vehicle can be depreciated into business accounts, which allows tax benefits 
  • Any money that is made above the final finance payment is yours to keep 
  • You avoid the risk of depreciation which is great if you choose to own the vehicle. 

The bad? 

  • The monthly payments tend to be more expensive than if you choose Contract Hire 
  • You’re still subject to mileage and vehicle condition (fair wear and tear), especially if you’re planning on handing the car back 
  • You’re responsible for taxing the car every year 

The ugly? 

  • The whole cost of the vehicle is shown on your credit file which could affect your credit score 
  • The interest rate is slightly higher than with a Hire Purchase agreement 

Does car finance affect mortgages? 

So, now that we have gone through the different types of car finance, explained the alternatives available, and the ups and downs to each, we should next answer the question: What if you’re planning on getting a mortgage? Does financing a new car affect this?  

A mortgage is agreed on affordability, but so is car finance. So, if your salary has only just been enough to be approved for getting a mortgage, we wouldn’t advise getting a car financed until the mortgage has been agreed upon. 

If, however, your salary has comfortably allowed you to get a mortgage, then as long as the car finance agreement is sensible then this shouldn’t cause any financial issues.  

If you’re wanting to get a vehicle on finance as your mortgage is going through, some finance houses do a soft search.  

What is a soft search? 

A soft search is when only you yourself can see the search, the mortgage company will not be able to see it. So, it’s fine to get the car finance in place, but you should wait to ‘activate’ it once the mortgage on your house is finalised.  

Can car finance be transferred to another person? 

Whether or not you can transfer your car finance to another person completely depends on the finance house. 

You can ask for a settlement figure from the finance house, you would then clear off the finance with anything left to pay and then the other person can buy it. 

On a vehicle lease, however, some finance houses will consider transferring the car finance to someone else. It depends on how creditworthy the proposed person is, and there could be some sort of fee from the bank when doing this. 

Ultimately you cannot reassign it; you can only refinance your car.  

Can car finance be in someone else’s name? 

What about if you know you want or need to finance a new vehicle, but you want it in someone else’s name?  

One option that used to be available as an accommodation deal. However, this isn’t usually allowed and rules around using this option have become a lot stricter in recent years.  

Why is this? 

Often, to insure a car you have to have a financial interest in it, and often you have to be the main driver.  

What does this mean? 

This essentially means that when a person has a car, but it is funded in someone else’s name, the person with the car is pretty much uninsured.  

In the terms and conditions of the insurance, it will be that the insured said vehicle is typically at your home, as you are the main driver. Now, with an accommodation deal, the vehicle is typically at a different property to the ‘main’ driver (the named person on the car finance agreement), which means the driver on the insurance isn’t the one actually driving the vehicle.  

So, therefore, one of the reasons why it’s not allowed is because the car is normally uninsured. Even if they have a certificate, it means nothing if they have done an accommodation deal. 

It used to be that parents could finance a vehicle for their children. Now, parents can be a guarantor but they are not allowed to finance the car for their child. 

Funnily enough, you are allowed to finance a vehicle for your spouse or partner. However, again, this usually isn’t a favoured option due to potential circumstances that may arise, such as a couple breaking up, which could become quite a messy situation for the finance house and vehicle supplier. 

Can car finance be in joint names? 

We’ve explained whether a car finance agreement can be in someone else’s name, but how about if you want a car finance joint with someone else together? 

Some vehicle finances can be in a joint name but, again, it depends on the finance house. You’d normally finance a car in joint names with someone when neither of you can afford to finance it yourself. 

Typically, if you are leasing a vehicle then you cannot finance this with someone else. It usually has to be part of a purchase scheme such as PCP or HP.  

By being in joint names you are equally liable, but if one party stops paying then the other party becomes 100% liable.  

The good? 

As car finance is in joint names it makes it a lot easier to get credit, this is because there are two people taking the risk.  

The bad? 

If the people in joint finance break up or have a dispute if one of them stops paying this then leave the other to make up the difference.  

The ugly? 

If this happens, this affects both of their credit. As far as the finance house is concerned both parties will get adverse.  

What if one person wants to leave the finance agreement? 

They should speak with the finance house and ask if they would consider taking them off the agreement. This will depend on the credit strength of the remaining person on the agreement.  

It should be noted that this is completely up to the finance house whether or not to approve this. So, once you’re in the car finance agreement, you could be in it for good. 

Why is car finance a bad idea? 

So, now you fully understand the good, the bad and the ugly of car finance explained. What if car finance is just a bad idea altogether? 

Vehicle finance is a bad idea when, just like anything else, you cannot afford the financial payments of the car.  

If you choose to prioritise the wrong things for your needs, such as choosing the fanciest trim level on a premium sports car, when you should instead focus on affordability, then vehicle finance could be a bad idea.  

If getting a car in finance would improve your lifestyle, then it is a fantastic idea. It all depends on each and every individual’s needs and requirements. A family with two dogs isn’t likely to need the same car as a business owner.  

Another situation where car finance would be a ‘bad’ idea, would be if you only needed a vehicle for a short period of time. A better option for this would be a car rental or a short-term rental

Hopefully, now you’ve read through the different types of car finance explained, understood the good, the bad, and the ugly of each and are one step closer to securing your car on the best finance agreement for your needs. 

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