If you’re looking to get a car on finance but haven’t had a finance agreement before or have chosen the wrong finance deal in the past, it can be hard to know what to do. There are a number of car finance agreements in the UK, but you may be more suited to one over others. The guide below has been designed to look into each in more detail and help you decide which would be best for your circumstances.
Types of car finance:
In the UK, there are 3 main types of car finance deals which tend to be the most popular. A PCP car finance deal, a hire purchase agreement and a personal loan are all great options if you’re looking to get a car and spread the cost. Each agreement has a different structure and can be suited to you based on factors such as credit worthiness, whether you want to own the car or not and how much you want to pay a month. Let’s take a look at each form of finance in more detail to help you decide which could be right for your circumstances.
Personal Contract Purchase (PCP)
A personal contract purchase (PCP) deal is a flexible form of finance which allows you to pay low payments each month and have a number of options at the end of your deal. Within a PCP deal, you make monthly repayments towards the cost of your chosen car until the end of the agreed term. You will need to set an annual mileage limit at the start of your agreement and also agree to keep the car in good condition throughout. If not, you can incur additional mileage and damage fees to pay.
PCP monthly payments tend to be lower than other options because you don’t cover the full cost of the car you choose; you instead pay off the value that the car loses over the agreement term. At the end of your PCP agreement, you then have 3 choices.
- Hand the car back to the dealer within the mileage limit and in good condition and there are no more payments to make.
- If your car has positive equity in the deal, you can use the car as part exchange towards a new car on PCP.
- Pay the large final payment and keep the car or refinance a PCP balloon payment to keep driving the car you love.
PCP car finance is best for:
- Low monthly payments
- Don’t have to own the car
- Flexible loan terms
One of the most straightforward forms of car financing is a Hire Purchase agreement. Within a hire purchase car finance deal, you make monthly payments with interest till the end of the agreed term, usually over 3-5 years. Monthly payments can be higher as you spread the cost of the car you choose into fixed monthly payments. Hire purchase is a form of secured loan which means the lender owns the car until the final ‘option to purchase’ fee has been made and then the car is yours to keep! Hire purchase can sometimes to better suited to people with bad credit as lenders can use the car as collateral if you fail to repay your finance back on time and in full. It can be possible to get approved for bad credit finance through hire purchase but you could consider increasing your credit score first to put you in a better position.
Hire purchase can be best for:
- Owning the car at the end of the deal
- People with lower credit scores
- Fixed monthly payments
A personal loan can be one of the most cost-effective ways to get a car on finance. Personal loans are usually offered by banks or building societies and can be better suited to those with higher credit scores. A personal loan isn’t secured against a vehicle and can be used to buy anything you like. You can either choose to take out a loan to cover part of the cost or the full cost of your chosen car. If accepted for a personal loan, you get the money deposited straight into your bank account and then you can buy a car from anywhere you like. You buy the car outright with the money and then make fixed monthly payments till the end of your chosen term. You will be the automatic legal owner of the car from the start of your loan and can modify it as you like.
Personal loans are best for:
- Low car loan interest for good credit
- Own the car from the start
- No mileage or damage restrictions