Mirror, signal, handbrake… know your next manoeuvre in car finance

24 September 2019

Whether you want a reliable family car, a vintage dream or a new run around, buying a car can be a complicated experience. Here are the options

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There are many things to consider when shopping for a car and one of the most important and perplexing aspects is picking the right finance option.

Given that in 2018 alone, 1.45 million used car buyers and 960,000 new car buyers purchased a car through finance, a significant number of people each year will face the bewildering maze of options available.

Picking the right finance deal for you can lead to thousands of pounds in savings, so setting aside the time to understand all options in the market should be a top priority.

If you have savings in the bank, this will of course be the cheapest way to fund your new car, but many people will need help financially. Over 90% of secured car finance is arranged at dealerships, but customers do have other options which can help avoid stress, confusion, and uncertainty.

For example, car buyers can arrange their secured finance online before choosing their car.

If buyers do want to get their financing through the dealer – it’s advisable that they shop around – understanding the type of payment plan that they are taking out and the true cost of it is key.

To make life a little easier, here’s a rundown of all the key finance options that you can choose from:

Hire Purchase (HP)

HP is available from car dealerships and finance companies. A HP plan can be fixed over different time frames and the balance is paid back – plus interest – in fixed monthly instalments.

With HP the debt is secured against the car. This means you won’t own it until the final payment is made. It also means that if you don’t repay the loan, the car can be repossessed.

You’ll normally need to pay a deposit at the outset, though this isn’t always the case so remember to check if this’ll affect the overall cost of the car.

As the loan is secured against the vehicle, the monthly costs may be lower. And through voluntary termination, you can also cancel your agreement early once you’ve paid half the agreed amount.

There are a few things to bear in mind:

  • You don’t own the car until the loan is paid off
  • You can return the car during the term, but will have to repay any outstanding balance
  • If you can’t meet the repayments, you will lose your car
  • You may need to fund an upfront deposit

Unsecured Personal Loan

In simple terms you’d need to take out a loan with a bank, or a finance company to gain an unsecured personal loan. The money is transferred into your account, and then you use the funds to pay for the car you’ve decided to purchase.

The loan would then be repaid in monthly instalments over a fixed term, typically one, three or five years.

The interest rate you get will vary. It’s dependent on the term of the loan, the lender, and personal factors such as your credit rating. The lowest rates will normally be offered to those with the best credit scores.

It’s important not to ignore the small print, some loans will have penalties for those who want to pay off early, but this isn’t the case for all providers.

If you do go for this route, be sure to shop around in advance to make sure you’re getting the best deal based on your personal circumstances.

As you’re buying the car outright, you own it from day one and are free to sell it at any time.

Watch out for the following:

  • Work out how the repayments will fit into your monthly budget
  • Your car’s value will drop over time, so it’s likely to be worth significantly less by the time the loan is repaid
  • Missing a repayment can hurt your credit score

Personal Contract Purchase (PCP)

This option is typically provided by car dealerships and some finance companies. You pay an upfront deposit – usually 10% – but then a far lower monthly payment over a fixed term, usually one to four years.

At the end of this period you’ll have two options: you can pay a lump sum — known as a balloon payment — and own the car outright, or simply hand the keys back, and take out another PCP or HP on a different car.

These contracts are based on something called a ‘minimum future guaranteed value’.

This is set at the start, and will be partly based on the annual mileage you think you’ll drive. It’s important to stick within this limit, ensure the car is regularly serviced and kept it in good condition, otherwise you could be forced to pay out for extra charges at the end.

If you’re prone to getting bored with your car and like to change it up every few years, PCP may be a good option for you. However, if you want to own the car at the end, a hire purchase agreement will probably be more suitable.

PCP tends to have lower monthly repayments, as you’re not paying for the full cost of the car over the term, however you will likely pay more interest compared to a HP with the same term.

And like HP, through voluntary termination, you can cancel your agreement early once you’ve paid half the agreed amount.

But remember:

  • You’re paying finance costs on a car that you may never own
  • If you can’t meet the repayments, you’ll lose your car
  • There are mileage restrictions on how far you can drive
  • An upfront deposit will probably be required

Personal Contract Hire

The final option that you may be offered could be personal contract hire. It’s very similar to PCP, as you pay a deposit and monthly repayments.

However, one of the biggest differences is that you’re renting the car and you have to give the car back at the end of the term.

The benefits of PCH are the same as PCP, but you need to be aware that:

  • You’re paying finance costs on a car that you will never own
  • If you can’t meet the repayments, you’ll lose your car
  • There are mileage restrictions on how far you can drive
  • You’re tied in for the full duration of the agreement

Didier Baclin is chief product officer at Zopa