You’ve spotted your next dream car, or you simply need a new one, but paying for it on your own is nigh on impossible. The answer? Car finance. But getting your head around all the different types of finance on offer and choosing the right one for you can be overwhelming.
But fear not. Here we’ve broken down the most popular types of car finance available so you can buy without the worry and no what you’re signing up for:
Why choose car finance?
Car finance with buy here pay here in New Jersey makes buying a car more affordable.You will often select a vehicle that you like and the dealer will then pass your information on to a whole network of potential lenders. In essence, the lender covers the upfront costs of your chosen vehicle and then you pay them back in low interest, monthly repayments over a fixed period.
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These payments rely on several factors, including how much money you want to borrow, the length of time you wish to keep the car and of course, the type of agreement you have.
The most common types of car finance are personal contract purchase (PCP), hire purchase (HP), lease purchase or personal loan. But there are plenty of flexible options out there to suit everyone’s set of circumstances.
Personal Contract Purchase (PCP)
Perfect for those who like to change their cars frequently.
A personal contract purchase (PCP) agreement typically involves paying a deposit (usually 10%) followed by low monthly payments over a fixed period. At the end of your contract, you can either hand the car back or use the equity as part downpayment or deposit on your next vehicle.
Alternatively, you can own the car outright by paying off the Guaranteed Minimum Future Value (GMFV) in the form of a “balloon payment.”
Before signing on the dotted line, make sure you read the terms and conditions of your agreement.
Pros:
- Flexibility: you can either keep the car or hand it back when your agreement ends
- Lower monthly repayments due to large sum paid at the end of your contract
- Better position to negotiate
- Easy budgeting: you pay a fixed cost over a set amount of time that is secured against the vehicle itself
Cons:
- You have to pay a final “balloon” payment (Guaranteed Minimum Future Value (GMFV)) if you choose to keep the car. It’s based on the estimated market value of the vehicle at the end of your contract term
- You may face charges if you return the car damaged or with excess mileage (there will be terms stipulated in your agreement)
- Regardless of whether you intend to keep the vehicle or not, you’ll be charged interest on the GMFV each month
Hire Purchase (HP)
Secured against the vehicle itself, a Hire Purchase loan gives you added peace of mind. Once you’ve made the final payment, the car is yours.
Just like a PCP loan, you typically pay a 10% deposit followed by monthly instalments, plus interest, until the end of your agreement. While you can’t sell it without the lender’s permission, you can return it should you wish.
Pros:
- No lump sum payment at the end
- Easy budgeting as payments are fixed throughout your loan period
- No imposed mileage restrictions
- Once half of your contract is fulfilled, you can typically return your vehicle if you opt for Voluntary Termination (VT)
- Better position to negotiate as finance is agreed upfront
- Servicing may be included
Cons:
- The car can be repossessed if you miss a payment
- Failing to make repayments could negatively impact your credit score
- Can be more expensive than a bank loan and other finance agreements
Personal Leasing
Similar to PCP, personal leasing gives you low monthly payments. However, there is no option to buy the car at the end of your lease.
Factors such as agreed mileage, type of car and contract length all determine the overall leasing cost. But unlike other finance options, you usually have to pay up to three months’ rental in advance.
Pros:
- Low monthly payments
- Easy and convenient way to change your car
- Perfect if you don’t want to keep the car
- Servicing is usually included
Cons:
- A large upfront deposit (usually three months’ worth) is required upfront
- Mileage limits may apply
- Be aware of hidden administration fees
Personal Loan
A personal loan is an unsecured loan that enables you to borrow an agreed amount of money over a fixed period. From the moment you take out a personal loan to purchase a car, that vehicle is yours from when the dealer receives the money via the lender.
What’s more, should you choose to sell your car, you don’t have to ask permission from your finance company.
Pros:
- The car is yours from the moment the dealer receives the money from your lender
- As an unsecured loan, your car can’t be repossessed
- You can sell at any time
- Payments are fixed throughout the term so that you can budget more easily
- You can use a personal loan to buy from any dealer or private seller
Cons:
- Maximum loans are capped at £25,000
- If you have a poor credit history, you probably won’t get accepted for a personal loan
- Dealers aren’t typically scrutinised by the finance company with a personal loan
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What if I have a poor credit rating?
Did you know that you can still get accepted for car finance despite your poor credit history?
Specialist finance companies like Carvine are passionate about getting everyone behind the wheel despite their financial circumstances. So if you are self-employed, have a bankruptcy, a CCJ, IVA or default, they will work alongside a panel of specialist lenders to get you the best finance deal to suit you.
Regardless of if you have been rejected in the past, “bad credit” car finance is available. What’s more, if you make your payments on time, you will start to repair your credit score. So it’s a win, win scenario.
Car finance is the simplest way to get behind the wheel of a new car without the need to wait and save up the upfront costs. Which type of finance would you go for?