Why Choose Car Finance?Thinking about a car finance agreement? Here are all the reasons we think it's a good idea...
We’re going to be honest, leasing isn’t for everybody. We know that, and we know that you know that.
So if you don’t want to lease and cash purchase isn’t for you, what are your options?
Well, that’s where car finance comes in. In this article, we’re going to look at what car finance is, the pros and cons, and whether it’s right for you.
What is car finance?
Car finance is a finance agreement, the same as any other type of finance agreement. The difference between car finance and a lease is that you own the car at the end. Whereas with a lease agreement, you hand the car back. There are three different types of car finance agreements available to you;
- Hire purchase
- Contract purchase (or personal contract purchase)
- Personal loan
A hire purchase is probably the most common finance agreement, and the one that you are probably most familiar with. You pay a certain amount each month over a set period of time and then when that time is up, you own the car and you have nothing more to pay.
- Hand the car back with nothing else to pay (subject to mileage and condition charges)
- Part-exchange the car
- Purchase the car for a pre-agreed amount
Of course, with a finance agreement, it’s the last one you want to be looking at. At the start of your agreement you will be given a Minimum Guaranteed Future Value. This is how much the car will be worth at the end of your contract. This depends on a number of things including the model and any additional extras. When you pay this, the car is then yours to keep and you have nothing more to pay.
The last option is a personal loan. This is where you pop to the bank, get a loan and then use that to pay for your car. You will then have to pay back the loan the way you would any other loan.
So those are the three car finance options that are available to you.
How is the cost of car finance calculated?
The amount you will pay depends on a variety of factors and also does depend on which finance agreement you go for.
How is a hire purchase calculated?
At the start of a hire purchase, you will be asked how much you want to put down as a deposit. This can be as little or as big as you like. However, the more you put down, the less you have to make in monthly payments. You will also be given the option of a balloon payment, this is a bigger payment at the end of the contract. If you choose to have a balloon payment then this will further lower your monthly payments. However, it does mean that you have to budget for this at the end of your contract, so the choice is yours.
Anyway, the price of the hire purchase is calculated as follows;
By calculating the interest on the amount you are borrowing, then dividing this by the total number of payments
It’s very straightforward.
How is a contract purchase calculated?
A contract purchase is calculated a little differently. At the start of the contract you will be given an Minimum Guaranteed Future Value. This is based on the make of the car, how many miles it will be doing, and the expected depreciation. This is how much you will pay if you want to own the car at the end which in the context of this article, you will want to do.
So, contract purchase is calculated by deducting the MGFV from the cost of the car and adding the expected depreciation. You then divide this by the number of months your contract is for. You can read more about how to calculate contract purchase here.
And then of course, you have a personal loan. With a personal loan the monthly repayments are to the bank, because you have already bought the car yourself. The amount you pay back depends from lender to lender, and depends on the APR. For more information on this, we recommend you read our article here.
What are the pros and cons of car finance?
Now we’ve gone through how each is calculated, what are the pros and cons of car finance?
What are the advantages of car finance?
Some of the advantages of car finance include;
- You own the car at the end
- This is pretty much the main reason people opt for car finance instead of a lease agreement. There are many that like the thought of owning their car at the end and for that reason, leasing just isn’t for them.
- Monthly payments make it easier to budget
- Not everyone wants to make one huge payment for a car, which is why a car finance agreement is so appealing. Monthly payments make for easy budgeting and mean that you won’t see all of that money come out at once.
- The deposit and option of a balloon payment mean you can cater your monthly payments
- If you want larger monthly payments then you can put down a smaller deposit. Alternatively, if you want smaller monthly payments then you can have a larger deposit and/or opt for a balloon payment at the end. Car finance is very flexible.
- Because you are paying monthly, you can drive a nicer car
- If you wanted to, you could opt for a nicer car as you will be paying it back overtime instead of upfront.
What are the disadvantages of car finance?
Of course there are also disadvantages to car finance, for example;
- You have to think about depreciation
- Because you own the car at the end, you have to think about depreciation. This is how much the car will lose in value over the course of you driving it. When it comes to reselling, this is something you will have to think about.
- You also have to think about reselling
- When you own the car, you are responsible for reselling or disposing of the vehicle. While this isn’t a problem for some, others might be put off.
- It can be more expensive than leasing
- If you aren’t too bothered about owning at the end, then leasing is a very viable option. It can be cheaper as you’re paying for the depreciation only. So, if you aren’t too bothered about owning then it’s something you might want to consider.
Why choose car finance?
Ultimately, people choose a car finance option because it is a very convenient way of owning a car. You don’t have to pay an excessive amount of money up front and you can easily budget for the monthly payments. If you don’t want to make a cash purchase and you don’t want to lease, then a car finance agreement is perfect for you.
Hopefully this has cleared a few things up about car finance and given you some idea of the types of agreements you will want to be looking at.
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