What car finance options do I have?

You’ve decided you need a new car. Great! But, now you have to think about your finance options.

We understand that car finance can seem like a daunting prospect. But, it’s actually quite simple. Essentially, it’s a two-step process;

• Decide which type of deal you want
• Choose a provider who will give you the best deal

However, there are different types of car deals and different types of providers. And, if this is your first time buying a car this way, it can be overwhelming. So, we’re going to talk you through the different car finance options available to you.

Before we start, there are three finance options that are available;

• Personal Loan
• Hire Purchase
• Personal Contract Purchase

Of course, we aren’t just going to leave it there; we’re going to explain them in all in detail so you can make an informed choice.

What is a Personal Loan?

Most people who opt to finance a car choose a personal loan. This is probably due to the fact that when you borrow money from a bank or another lender, you get instant ownership of the car.

When it comes to comparing loans, you need to take a look at the annual percentage rate (APR). This will tell you how much the loan will cost you during its lifetime. The longer the period, the lower the monthly payments.

What Are the Different Types of Personal Loan?

There are two types of personal loans that you can get;

• Secured
• Unsecured

What is a Secured Loan?

If you choose a secured loan, you will be asked to put down collateral. This is security for the finance house and is the most expensive item in your possession, which in this case, would be your car. If you default on payments and you cannot pay those back, the lender will seize your collateral and sell it.

What is an Unsecured Loan?

If you don’t fancy putting down collateral, you can get an unsecured loan. This doesn’t require you to put down collateral but this does raise the stakes for the lender. They are trusting you to pay them back purely by looking at your credit rating.

What are the Pros and Cons to Taking Out a Personal Loan?

Some of the advantages to taking out a personal loan when getting a car are;

• You don’t have to pay a deposit
• The car will be yours to own outright
  • This also means you won’t be restricted by mileage or have to keep the car in good condition.

However, there are also some disadvantages that you should be aware of;

• The monthly payments could be higher
  • They may be higher than if you were to go for a personal contract purchase or a hire purchase

• You won’t be protected under the Consumer Credit Act
  • This is because you own the car outright

What is a Hire Purchase?

A hire purchase is a really simple way of buying a car, and is a popular choice amongst customers. Essentially, you pay a deposit and then make a series of fixed monthly payments. After that, the car is yours.

What are the Pros and Cons of Hire Purchase?

Obviously, there are quite a few advantages to hire purchase otherwise it wouldn’t be so popular. For example;

• You own the vehicle
  • At the end of the agreement, you own the car outright

• The loan is at a fixed rate
  • This means it won’t be affected by interest rates

• You can reduce the monthly costs with  a balloon payment
  • This is a larger sum at the end of the contract. This will pay off the rest of the finance.

• You aren’t restricted by mileage
• The contract can be longer
  • This is longer than something such as a personal contract purchase. This means that the monthly payments will be lower

But, there are disadvantages to a hire purchase;

• Monthly payments tend to be higher
  • This is compared to a lease

• The finance house will still own the vehicle until the final payment
  • Unlike if you took out a personal loan, you technically don’t own the car until the final payment is made.

• Insurance needs to be fully comprehensive
  • Similar to a lease, the insurance has to be fully comprehensive until you make the last payment. This is because the finance house still has financial interest in the car. This can slightly more expensive.

What is a Personal Contract Purchase?

A personal contract purchase is the second most popular method of financing a car. You essentially pay a fixed amount each month for a certain period of time. This tends to be less than a hire purchase and is usually between 2-5 years. Once that time is up, you have three options;

• You can hand the car back and look for a new one (subject to mileage and vehicle condition)
• You can make a final one-off payment to own the car outright. You do this by paying the Minimum Guaranteed Future Value (MGFV) which is how much the car is expected to be worth at the end of your contract. This is determined at the beginning of the contract.
• You can trade it in. This will then clear of the existing finance. If you have equity, you can use it towards the deposit of your car.

What are the Pros and Cons of Personal Contract Purchase?

Some of the advantages to Personal Contract Purchase are;

• It’s flexible
  • You have three options to choose from, and you don’t have to decide what you want to do until towards the end of your contract.

• The end payment is pre-agreed
  • This means that should you decide to buy the car you know exactly how much it is going to cost you.

• You can hand the car back
  • As long as you stay within the pre-agreed mileage and keep it in a good condition, you can hand the car back at the end.

But, the disadvantages to personal contract purchase are;

• It is usually more expensive than personal contract hire
  • You can read about personal contract hire here.

• The interest rate tends to be higher than on a hire purchase
• You are responsible for the tax on the vehicle
  • When you lease a car, the road tax is usually included

• The full vehicle cost is shown on your credit file – this could affect your credit score
• If you choose to hand the car back, you are subject to mileage restrictions and fair wear and tear.

Dealership Vs. Broker

Okay, so we’ve gone through the different finance options, now you have to decide whether a broker or a dealership will get the best deal for your situation. This is an important decision because different people prefer different things when it comes to buying a car. So, you need to weigh up the pros and cons to decide whether you are best suited going through a vehicle broker or a dealership.

What Are the Pros and Cons to Going Through a Vehicle Supplier?

While going through a dealership is the most traditional way of getting a car, brokers are becoming an increasingly popular way of getting a car. Some of the advantages are;

• They are independent
  • Established vehicle brokers are not tied to a particular brand or finance house
  • This means they can give you a truly honest opinion

• They can access the ‘fleet’ discounts
  • Dealerships can only access retail discounts

• They have access to more finance houses
  • Some brokers will have access to multiple finance houses.
  • This means that they can find the best finance deal for your situation

However, there are some disadvantages to going through a vehicle broker. If we’re being honest, many of these can be avoided if you go through a trustworthy broker. But, it’s worth mentioning them anyway;

• They may not be reputable
  • Some brokers are not as reputable as others. You can read our article on how to tell if your vehicle broker is trustworthy here.

• You could get charged an extra fee
  • Brokers have admin fees, and these can be pricey. You can read about why you have to pay an admin fee here.

• Some are limited to funders
  • Not every broker has a vast and established network. This means you might not be getting the best deal for you.

As we said, some of these can be avoided by going through a reputable broker. You can download our Ultimate Vehicle Broker guide for everything you need to know on brokers.

What Are the Pros and Cons of Going Through a Dealership?

As I mentioned before, going through a dealership is the more traditional way of getting a car. Some of the advantages of this are;

• You can benefit from retail discount
  • Dealerships can have some great discounts. Particularly when they need to clear their forecourts.

• You don’t have to pay an admin fee
  • While this isn’t a huge thing, it’s something you should consider.

However, there are cons to going through a dealership. For example;

• You don’t have as many options
  • Dealerships tend to have access to only a few finance houses. This means you might not be able to get the best deal for your situation.

•  You’re limited to one brand
  • This is more about the actual car than the finance but you’re limited in terms of choice if you go through a dealership. They are also limited to their own stock and the vehicles they have on order.

So, as you can see, there are few different finance options. Not all of them will be suited to your situation so it’s important you consider each option thoroughly. Ultimately, it’s your decision and you need to research which option will be best for you.