Personal loan is perceived to be the most popular way to finance a car according to many surveys.
Borrowing money from a bank, building society or other lender gives you instant ownership of the car. Comparison websites such as money supermarket will show you which lenders offer the best deals.
The annual percentage rate (APR) is the easiest way to compare loans, and essential in working out how much a loan will cost you over the repayment period chosen. If the APR isn’t mentioned then ask the question, the headline rate is not always what you get it depends on your individual credit rating.
It’s a temptation to take a longer repayment period which makes the monthly repayment smaller but you will pay more interest. Keep the loan period as short as possible.
The downside to a personal loan unsecured is that in the event of default any of your assets could be seized. With dealer finance only the car is at risk in the event of payment default.
Go for a personal loan if you say YES to any of the following:
• You don’t have any deposit
• You want to own the car outright
• You plan to keep it for a while
• You don’t want annual mileage restrictions
After a bank loan hire purchase (HP) is the easiest way to buy a car.
Under HP agreements there’s usually a deposit to pay, typically 10% followed by fixed monthly payments. The car is owned by the HP funder until it’s paid for including any option to purchase fee. At that point the customer has the right to sell the vehicle.
However some customers do sell their cars before the final payment and the good news is for buyers of non-paid up cars is that the law protects private purchasers who buy without knowing the car is not fully owned and no matter what the police or anyone else tells you will get good title if you buy a car on HP in these circumstances. The finance company can ultimately take action against the seller but that’s not your problem.
The credit on an HP agreement is secured against the car, so it’s like dealer finance in that the car can only be seized in the event of default. If you need to sell the car before the end of your agreement you will have to settle the outstanding monies first and early settlement fees may apply.
Go for HP if you say YES to 1 of the following:
• Ultimate ownership is important to you
• Your budget and circumstances suit fixed monthly repayments
• Your disposable income may decrease over the agreement term (eg if you’re planning a family)
• You like credit secured against the car only
• You don’t mind not owning the car until the debt is fully paid.
Personal Contract Purchase (PCP
This product is probably the most popular product of all.
It’s a bit like HP in that you pay a deposit, a fixed rate if interest and monthly repayments usually over 12 to 48 months.
Where PCP differs from HP is at the end of the agreement you have 3 choices.
1. Return the car to the supplier
2. Keep the car
3. Trade the car in against a replacement
The first option returning the car costs nothing, unless you’ve gone over an agreed mileage or returned the car in poor condition. In either case there will be an excess to pay.
Keeping the car means making a final “balloon” payment. This amount is the cars guaranteed future value, or GFV, which is set at the start of the agreement.
The GFV is based on various factors, including the length of the loan and the anticipated mileage as well as the cars projected retail value. If you exercise this final buying option, you can continue to run the car, or you can sell it and pocket any equity above the GFV that you have paid back to the finance company.
If you’re trading in your car, any GFV equity can be used as deposit towards its replacement.
If your car has gone into negative equity which can happen you will have to make up the difference. Shorter agreements are more likely to accurately project the GFV.
Go for PCP if you can say YES to 1 of the following:
• You want lower monthly payments
• You like the flexibility of options at the end of the agreement
• Trade the car in against a replacement
Personal contract hire (PCH)
This product is basically renting your car for typically 2 or 3 years with an agreed mileage limit. There is no option to buy the car at the end of the contract you just hand the car and the keys back to the finance company. Your payments are covering the cars depreciation.
While you’re running it, you’re responsible for its upkeep. On the plus side, the deposit is low as are the fixed repayments and you can negate the impact of repair bills by including a maintenance element into the agreement.
Cars that hold their value well are a good PCH option because the difference in their new and three year old values will be smaller so you will repay a lower amount whilst cars that plummet in value will see you pay more.
Go for PCH if you can say YES to 1 of the following:
• You don’t want to own the car or suffer its depreciation
• You like being able to change cars often
• You like the idea of driving better cars than you could normally afford
• You don’t mind looking after cars
Research is a must here as motor dealers love lazy buyers who haven’t done their research. There is no point in haggling on vehicle price if you waste it all on a poor finance deal.
Check out detail on current and forthcoming manufacturer finance deals. These might include interest free or low APR rates or deposit contributions.
Don’t fix on the rate or monthly payment though look at the total repayable to understand the total cost and compare with what you can find in the open market.
Also don’t assume that a dealers finance rate is set in stone, everything is negotiable. Take time to go through things you are not sure about and get the final offer in writing.
The only thing at risk if you don’t keep up dealer finance repayments is the car. Bear in mind that even with sweeteners thrown in the dealer will still make money somewhere in the deal and you are paying for it.
Go for dealer finance if you can say YES to 1 of the following:
• You like the convenience of “package” deals
• You’re happy to do some comparison research
• You don’t want to do the research but you don’t mind paying extra
Self – finance
If you want to own your car using your own money by buying outright it does make some sense when UK savings rates are so low. Buying a car outright is also a sensible alternative to leasing if your mileage is high or unpredictable because of excess mileage charges.
Using a credit card be an advantage as many funders offer 0% on balance transfers and purchases. You can avoid paying interest charges altogether by changing you card at the end of interest free periods.