Different Types of Car Finance

Getting a new set of wheels? Find out what types of car finance options there are before you do anything!

Congratulations! You’ve decided to get a new car. Now comes the question of how to finance it. This guide will unveil the different car finance options in the UK, helping you choose the right deal for your needs and budget.

How Car Finance Works

Car finance allows you to spread the cost of a vehicle over a set period, typically 12 to 60 months, through monthly repayments. Here’s a breakdown of the key players involved:

• You (the borrower): The individual looking to finance the car.
• Lender: The financial institution providing the loan (e.g., bank, building society).
• Broker: We act as an intermediary, connecting you with multiple lenders offering competitive rates for your chosen car finance option.

What Different Types of Car Finance are there?

There are lots of different types of car finance to choose from, but finding the right one for your particular needs is important. Here is a list of some of the most common ones:

Hire Purchase (HP) Car Finance:

Hire Purchase, or HP car finance, is the simplest form of financing a new or used car. You borrow the money from the lender and pay it off in instalments with interest within a pre-agreed period, usually between 24-60 months. You typically deposit the cost at the start of the agreement, between 10-20% of the car’s value.

It is one of the most popular car financing methods and is achievable even if your credit score is lower than you would like it to be.

Pros:

• You build ownership equity with each payment.
• Once paid off, the car is yours to keep, sell, or modify freely.
• Generally simpler than other loan options.

Cons:

• You will own the car once the final payment is made.
• Generally, there are higher interest rates compared to some other options.

Hire Purchase is an excellent option for someone who wants to spread the cost of buying a new or used car. However, it is important to consider the monthly repayments.

Personal Contract Purchase (PCP) Car Finance:

Personal Contract Purchase, or PCP car finance, is similar to Hire Purchase in many ways in the sense that you put a deposit down and make regular payments towards the cost of the car. The main difference is that at the end of the agreement, you have three options:

• You pay a balloon payment, also known as the guaranteed minimum future value (typically a significant portion of the car’s remaining value), to own the vehicle.
• You can simply hand the car back to the lender with no further obligation (subject to mileage and wear-and-tear conditions).
• Sometimes, you can refinance the GMFV (guaranteed minimum future value) into a new PCP agreement for a different car.

These deals are top-rated as the repayments are usually lower than a Hire Purchase deal. They are also an attractive option for those who wish to change their cars more often.

Pros:

• Lower monthly payments compared to HP for similar cars.
• Flexibility at the end of the term – choose to own, return, or upgrade.
• It often suits those who like to change cars frequently.

Cons:

• You will only own the car outright if you make the final GMFV payment.
• Mileage restrictions may apply, with excess mileage charges if exceeded.

When choosing a PCP deal, it is essential to consider the end of the agreement. Will you want to keep the car at the end of the contract? If so, you will need to have the GMFV amount ready to pay. Some people will want to upgrade to a newer car, which is also an option. Of course, you can also hand the vehicle back.

How to Get a Car Loan:

A car loan is a traditional personal loan used explicitly for car purchases. You borrow the amount you need from a lender to buy the car you want outright, and it is yours as soon as you drive out of the garage (depending on whether the loan is secured or unsecured against the car). You repay the loan with interest as with any other type of loan over a set period.

Pros:

• You own the car from the start and can do with it as you wish.
• It is more flexible compared to PCP or HP – no mileage restrictions or limitations on what you can do with the car.

Cons:

• Often, there are higher interest rates compared to HP or PCP deals.
• It requires a larger upfront payment than PCP or PCH.

This option is excellent for those who wish to own the car outright, who don’t want mileage limitations, etc. The repayments may be slightly higher than other options, but you have more control.

Considerations – Which Type of Finance is Best for Me?

It is always an exciting time when purchasing a new car, we are excited for you! But it is also essential to consider all of your options, compare each, and make sure you pick the correct one for your needs and circumstances.

• Budget: Consider your monthly income and how much you can comfortably afford for repayments.
• Desired ownership: Do you want to own the car outright or prefer to upgrade to a new car every few years?
• Mileage: How much do you expect to drive? If you’re a high-mileage driver, opt for a plan with flexible mileage limits.
• Credit score: Monitor your credit score regularly. If your score is less strong than you would like, investigate loan options that are beneficial to people with lower scores.

Our team of expert ninjas can help guide you to the right finance package for your needs. We can also help you to find the perfect car if you need it!

Come to the car finance ninjas and try our no-obligation car finance calculator to get a quote today!