Buy your next vehicle outright and you will obviously have to save all the money to cover the price tag beforehand. This isn’t the case for any other option though, thanks to the various types of car finance available — whether you’re buying a new or used car. Vindis, which can provide you with an excellent Audi service plan if you’re thinking of purchasing a vehicle from this well-known German brand, is on hand to detail what is meant by each option below…
Car finance options available when buying new
1. Personal loan
You’ll need to arrange a visit to a bank or building society to get a personal loan. Once granted, these enable you to spread the cost of purchasing a new car over a period of time that can last anywhere from one year to seven years. According to the earlier mentioned survey by WhatCar? a personal loan is the most popular way to finance a new vehicle, with a third of those who were involved in the motoring publication’s poll saying they favoured this finance option over all others.
Personal loans are ideal if you’re looking to borrow money over a long period of time. This is because they usually make for the cheapest finance option to do so. They also mean that you will own the car from the moment you take out the loan. Competitive fixed interest rates can be gained if you shop around for your personal loan too, while you often won’t even need to worry about paying a deposit to get the loan.
Use a personal loan to buy a new car and you’ll receive so many benefits. You won’t need to worry about any annual mileage restrictions, for instance, while you won’t need to hand the car back to the dealership once the loan is paid either — thus no need to be concerned about reconditioning costs either.
Never fall behind on your payments when it comes to personal loans mind. If you do, any of your assets can be seized — only your vehicle will be vulnerable to being reprocessed should the same thing happen with dealer finance. A clean credit rating will likely be required if you want to take out a personal loan too, while you’ll also beat the brunt of your car’s depreciation due to you owning the vehicle from the moment you take out the loan. Ensure the vehicle that you have your eyes on will be something that you can imagine driving for years to come, as the lender will still require you to repay the full loan even if you sell it or it gets written-off.
2. Personal Contract Hire (PCH)
Hoping to lease a car? Then you will want to choose personal contract hire (PCH). This is because you will never own the car in question when taking out a PCH plan; it must be returned at the end of the contract term.
Ahead of making use of a car from a dealership, you’ll need to sort out an agreement where you pay the dealer a fixed monthly amount in order to receive the privilege. Fortunately, the costs of servicing and maintenance are both factored into this amount. Once a PCH agreement ends, you simply hand the car back to the dealer and needn’t worry about the vehicle depreciating in value.
Eager to keep on switching your set of wheels? Then PCH will likely be the best finance option for you. However, take note that you must ensure the vehicle remains in good condition during the entire time it’s in your possession and that you don’t exceed the annual mileage limit agreed at the start of the agreement — extra costs could come your way otherwise.
3. Hire purchase (HP)
It’s not too difficult to understand hire purchase (HP). Sixteen per cent of those involved in a WhatCar? survey admitted they favoured this type of car finance.
Ahead of taking out a HP agreement, a deposit will need to be paid. This is often 10 per cent of the total value of the car at the time of the purchase. From there, you repay the remaining balance in monthly installments, plus interest, throughout the rest of the loan period.
Pay the loan in full and you’ll become the outright owner of your set of wheels. Up until then, you won’t need to be concerned about any excess mileage charges and there’s no reconditioning costs to worry about either.
HP agreements have quite a selection of consumer rights attached to them as well. You may be able to return the vehicle once you’ve paid half the cost of the vehicle and not be required to make any more payments, for instance, while your lender will not be in a position to repossess your car without a court order after you’ve paid a third of the entire amount that you owe.
Just keep in mind that until the entire HP agreement has been paid, you will need by the owner of the vehicle. Therefore, miss a payment or a collection of them and you could well be at risk of losing the car. Likewise, you won’t have a legal right to sell the car until all payments have been made.
4. Personal Contract Purchase (PCP)
Personal contact purchase (PCP) agreements have quite a few similarities to the HP agreements that we’ve just discussed. Ranked as the second most popular finance option when buying a new car according to the aforementioned WhatCar? poll, with 25 per cent of those involved in the poll saying they favour this technique, you again pay a deposit, which is often ten per cent of the vehicle’s overall value too, before paying a series of monthly installments.
During the period that a contract runs, the monthly installments of a PCP agreement will be paid towards the depreciation being made to the value of the car during that time. This is different to the whole value, like with HP agreements. Once you reach the end of the contract term, you’ll be presented with three options with what you want to do next:
- Return the vehicle to its supplier — this won’t cost you anything unless you’ve exceeded your agreed mileage or fail to return the car in a good condition.
- Take full ownership of the vehicle — though for this option, you will be required to make a final ‘balloon’ payment. This amount will be the car’s guaranteed future value, or GFV for short.
- Trade the vehicle in and use any GFV equity as a deposit towards getting your hands on a new set of wheels.
You’re repaying the difference between what the vehicle was worth when it was brand-new and the sum that it’ll be worth come the end of a contract with GFV then, on top of the cost of interest. Take note too that the GFV will be agreed before a PCP contract begins, though so too will a mileage allowance — and any excess mileage charges will apply if you go over this limit.
Take note of a few additional considerations regarding PCP agreements too. For instance, you will be unable to sell the vehicle during the contract period of the PCP agreement, as you won’t own the car during this term, while some PCP contract providers will have a limit on the number of days that a vehicle can be out of the country — something that’s certainly worth thinking about if you drive abroad at least from time to time.
Found yourself in a situation where you will want to settle a PCP agreement earlier than you had originally agreed? Then take note that the difference between the car’s current value and the payments which are outstanding must also be paid. Early settlement charges sometimes apply here too, so bear that additional cost in mind too when thinking about doing this.
Car finance options available when buying second-hand
HP and PCP agreements can both also be used if you opt to buy a second-hand car.Each agreement uses the same principles as we’ve covered earlier as well. Of course, you can also take out a personal loan when looking for a way to finance a used car.
Leasing is more of a complicated topic in the used car market though. Some dealers will allow their used cars to be leased, but not all of them. Many dealers will determine the amount that you have to pay on a monthly basis based on how much they expect the vehicle that’s being leased will depreciate over the finance term you have in mind. This may result in you witnessing more expensive leasing deals that you’d have expected though, as the residual values of used cars are usually more difficult to forecast and so dealers will be aiming to always cover the cost of any unexpectedly severe depreciation periods.
