Today most new cars are bought through finance deals as they are the most accessible and affordable way of spreading the cost.
Let’s face it, though, deciding which car finance option to go for can be confusing, and for the everyday driver it can seem like car dealerships are speaking another language or simply feeding us a load of jargon.
That’s why this post is here; to break the main car finance options down into easily digested chunks.
Let’s look at the types of car finance available and the pros and cons of each one.
Hire Purchase (HP)
Hire Purchase is a contract plan where you pay for the car in instalments over a set period on months (usually 12-60). This type of finance option is organised by a car dealership and you will usually have to put down a 10% deposit. The loan is secured against the car, so you will not own it until the last payment has been paid.
Pros: It’s a quick, easy and popular way to buy a new car, and most people’s first choice. The deposit is low, and repayment terms are flexible and can be up to 60 months if required (meaning monthly payments will be lower).
Cons: You won’t own the car until you have completed all of your payments, and it can be expensive if you want to pay it over a shorter term. Longer payments will be cheaper but you can be paying for the same car over years.
Bad Credit Car Finance
If you have a bad credit rating, obtaining finance is going to be difficult through most lenders, but bad credit car finance specialists are much more likely to lend money to those who may not have the best history. Clearway Car Finance is a specialist finance company lending to those with bad credit, enabling them to begin a Hire Purchase contract.
Pros: Bad credit car finance is the best way to obtain credit if your history isn’t great, for example if you have missed payments in the past, have CCJs or have been made bankrupt. Paying on time could help improve your credit rating and enables you to buy a new car.
Cons: If you consistently miss payments, or you can’t really afford it, you will only make your credit rating worse! Make sure you can afford the repayments before entering a contract and don’t buy an overly expensive car just because you can.
Personal Contract Purchase (PCP)
Personal Contract Purchase (PCP) deals are becoming increasingly more popular because they tend to be more affordable and more flexible than Hire Purchase deals. This type of finance is a variation on HP, but instead of paying to own the car, you are essentially only paying to hire the car.
How it works is that instead of paying for the car outright, you agree to pay for the difference between the car sale price and the price for resale back to the dealer. The price for resale is based on a predicted annual mileage over the period of the agreement. When the agreement comes to an end, you can give the car back and pay nothing, or you can pay the resale cost of the car and keep it.
Pros: PCP means that you can take time to decide if you want to keep the car, and if you want, you can trade in the car for a new one and start the process again. Costs tend to be lower than HP as you are only paying for a fraction of the overall cost of the car.
Cons: You have to watch the mileage and the condition of the car when you return it to the dealer, as if you go over the agreed mileage or the condition of the car deteriorates, you will have to pay extra costs. You also have to pay a lump sum at the end of the contract if you wish to keep your car.
Whichever form of car finance you go for, make sure you do your homework and decide which kind of car you would like to purchase and that you are confident you can make the re-payments. Buying a new car is expensive, but with the right finance package it can be a great investment.