Buying a car is one of the biggest purchases you’ll ever make after purchasing a home. You’ll likely use it to commute, travel to see friends and family or cart around your own brood from A to B. But affording a new, nearly new or used car from scratch is impossible for most of us.
Fortunately, that’s where car loans make a seemingly impossible expense possible. Rather than spending months, sometimes years saving up; instead, you can go and buy your new car within moments of your application being approved. Then, you make low monthly payments that won’t break the bank. Simple.
Not sure where to start with finance? Here are 7 things you need to know about car loans:
It’s helpful to have a budget
While you’re pretty much guaranteed to be offered a finance package no matter if you’re buying your fresh set of wheels from a broker, dealer or car supermarket, knowing your own limitations ahead of signing on the dotted line will help you not to overspend and stay within your budget.
Figuring out how much you spend on fuel, tax, insurance, and maintenance already is an excellent place to start. Move on to your monthly living expenses, such as utilities, mortgage/ rent and even your average food shop, and you’ve got a good overview of what you can reasonably afford each month.
Car loans aren’t a one size fits all
There are four main options to choose from when it comes to financing: a personal contract plan, hire purchase, personal leasing/ contract hire, or a personal loan. All of these options have different qualities that will suit some but not others. So it’s essential to understand ahead of time what you are signing up for.
Now that you have a budget in mind, this will help you decide which type of finance works best for you. Plus, it will help you consider if you want to ultimately own the car outright or upgrade your vehicle in a few years.
What is a Personal Contract Plan (PCP)?
A PCP loan is one of the most popular ways to finance a car. Not only is it available from finance brokers, dealerships and car supermarkets, but you can use it to buy new vehicles as well as some used cars.
Unlike other car loans, you don’t borrow the total price of the car. Instead, the finance company will calculate the predicted minimum value for the vehicle at the end of your agreement. Known as the ‘guaranteed minimum future value’ (GMFV), your monthly payments take into consideration the price of the car, the interest rate (APR) and how much the car’s value is likely to depreciate.
You can expect:
- To pay a 10% deposit before making low fixed monthly payments typically over a 3 to 5 year period
- Servicing is often included, but check the terms and conditions
- At the end of your agreement, you can either return the car to the seller with no additional fees attached, pay a final “balloon” payment (equivalent to the GMFV) and keep the car or use the resale value towards a new car
Personal Lease/ Contract Hire
Great for people who like to switch their car regularly, a personal lease or contract hire is very similar to renting a car. Like PCP, car dealerships, finance brokers and car supermarkets all offer this type of car loan for new and used car sales.
Unlike PCP, there is no option to buy the car at the end of your agreement.
You can expect:
- To pay three to six months rental in advance as a deposit followed by monthly payments
- The longer the agreement, the lower the monthly payments
- You will have to pay for any damages that occur during the lease
- Servicing is typically included
- VAT is not always included in the advertised price
A hire purchase loan is pretty straightforward. Typically, you pay a 10% deposit and then pay off the car’s remaining value over one to five years through fixed monthly installments.
Like the others, hire purchase is available from car dealerships, car supermarkets and finance brokers for new and used cars, but not private sales.
You can expect:
- Low monthly payments depending on the length of your agreement
- To pay a ‘transfer fee’ or ‘option fee’ at the end of your agreement term to own the vehicle outright
- You can’t sell the car without the lender’s permission until your final payment has been made, which is usually inexpensive
- Make sure you check your terms and conditions to see if servicing is included
Perhaps the most common of all car loans is the traditional personal loan. Available from banks, building societies and peer to peer lenders, you can use a personal loan to finance a new, used or private car sale.
Although loan terms vary greatly, you will borrow a fixed sum that you will pay back in fixed monthly payments, plus interest between one to seven years.
You can expect:
- Variable interest rates depend on how much money you want to borrow. Smaller loans tend to have a higher APR attached, while loans of £15k or more have a lower APR
- Personal loans can be secured or unsecured. Secured loans are typically cheaper, but the risk is having your property or assets seized if you fail to make your payment. Unsecured loans are more likely to be secured against the vehicle itself, so they are less risky in the long run but could cost more
Car loans are available even with a poor credit history
While people with a good credit score are more likely to get offered lower and more competitive rates on the market as lenders view them as less risky due to their previous credit history, bad credit car loans are available from specialist lenders.
No matter if you have no credit history or have a default, CCJ, IVA or are self-employed, “bad credit” lenders will work alongside you to find you the best, most affordable deal to get you on the road and rebuild your credit score.
Car loans make buying your next vehicle more simple. They make the financial blow more affordable with low monthly payments and give you more flexibility and choice. Which car loan suits you best?
Read also: How Small Loans Affect Your Credit Score