Car finance is a popular way for drivers to get the car they want but pay for it over a term that suits them. Monthly payments are made to a finance lender over several years. What’s great about car finance is you can adjust the deal to suit your monthly budget. However, a common car finance mistake many drivers make is not exploring all types of finance before making a decision.
At UK Car Finance, we are a broker and not a lender and that means we can introduce you to a lender who may want to offer you a finance deal. We help compare deals on your behalf and choose the one with the lowest APR rate! We specialise in both Hire Purchase and Personal Contract Purchase but these aren’t the only finance options you may have. You could also think about getting a personal loan, using a credit card to buy a car or car leasing.
1. Personal Loan.
A personal loan is when a lender agrees to give you a set amount of cash and it gets deposited into your bank account. You then make monthly payments back to the lender until the end of the agreed term. Personal Loans can be spread over 1-7 years, depending on what suits you. Getting a personal loan means you can walk into a car dealership and buy a car outright, just like a cash buyer! For many people, a personal loan can be the most cost-effective way to get a car but it may be the best car finance for people with good credit and it can be hard to get approved with a low credit score.
Pros:
- You’ll own the car from the start because you buy it outright.
- Usually, personal loans have low interest rates.
- You can buy from a dealer or private seller.
- You can make modifications, there are no mileage limits and you can sell the car when you want.
Cons:
- If you sell the car before the agreement ends, you’ll have to keep making payments or use the money to pay off the loan.
- Personal loans can be hard to obtain with a low credit score.
- Monthly payments can be expensive.
- The car may depreciate at a high rate during your loan, affecting its resale value.
2. Hire Purchase (HP).
Hire purchase is one of the most straightforward ways to finance a car. Hire Purchase is a secured loan which means the lender has the rights to the car during the agreement and can use it as collateral. When you apply for a hire purchase deal and get accepted, the lender will buy the car you want (within your budget) from an FCA-approved dealership. They buy the car on your behalf and then you make the agreed monthly payments back to the lender. Hire purchase car finance is really easy, the total loan amount (your car value and any other fees plus interest), is split into equal monthly payments over several years. At the end of the deal, there’s just a small option to purchase fee to pay and you take ownership of the car from the lender.
Find out more on our dedicated hire purchase car finance page.
Pros:
- Monthly payments and interest rates are fixed throughout the term.
- The option to purchase fee is usually similar to what you’ve been paying monthly and once it’s paid; the car is yours to keep.
- There’s no mileage or damage charges at the end of the deal.
- HP can be bad credit-friendly.
Cons:
- You won’t own the car until all payments and the final option to purchase fee is paid.
- If you fail to meet the repayments, the lender has the right to take the car away from you.
- Monthly payments could be higher than other forms of finance.
- HP with bad credit can be possible but it can mean high interest rates.
3. Personal Contract Purchase (PCP).
Personal Contract Purchase is another example of a secured loan and did you know it’s actually a form of hire purchase? Unlike hire purchase though, it has a more complex structure. PCP car finance is one of the most popular ways to finance a car because it offers low monthly payments. Instead of spreading the total cost of the loan into equal payments. You make monthly payments to pay off a fraction of the loan. This helps to keep monthly payments low, even on brand-new cars! At the end of the deal, much of the value of the loan is held in a large balloon payment. You can choose to pay the balloon or refinance a balloon payment and keep the car. The balloon payment is usually quite large though and for many divers, its unrealistic to pay outright. You also have the choice to hand the car back to the dealer or use any positive value in the loan towards a new car on a new PCP deal.
Find out more about how PCP car finance works.
Pros:
- The most flexible way to finance a car with multiple options at the end of the deal.
- You don’t have to own the car.
- Low monthly payments and fixed interest rates.
- Can be used on both new and used cars.
Cons:
- If you want to keep the car, the balloon payment can be very expensive.
- You’ll need to set an annual mileage at the start of the deal and charges can be applied if you exceed it.
- You may also be charged if you don’t keep the car in good condition.
- It’s a secured loan which means if you fail to repay, the lender can take the car from you.
Related Content – PCP car finance myths BUSTED!
4. Credit Card.
Many car dealers now offer the option to buy a car on a credit card. If you want to get a car with a credit card, we recommend you choose one with 0% interest. Search around for a deal which has the longest interest-free period to ensure you have enough time to pay off the value of your car. After the 0% interest period has ended, you’ll need to pay interest and it can make your car more expensive than it should have been. Buying a car with a credit card means you can choose how much you pay back each month and it could even be cheaper than some other car finance options.
Pros:
- Special introductory offers could see you pay 0% interest for as long as 2 years.
- You’ll be protected by the Consumer Credit Act when making a car purchase with a credit card.
- Choose how much you want to pay off each month.
- You’ll own the car from the start of the deal.
Cons:
- If you fail to pay it off within the interest-free period, interest rates can be high.
- Not all dealerships will accept credit cards so it can be worth checking first.
- You may not be accepted for a large credit limit and may only find out when you apply.
- The dealer may not let you pay the full amount on a credit card.
5. Leasing.
Car leasing is essentially the hire of a car for an agreed term. If you’re wondering if car finance or a car lease is better, it can depend on what you want from your next car. If you’re not bothered about ever owning a car and want low payments, car leasing could be perfect for you. It has a similar structure to PCP with low monthly payments and an agreed fixed period but no option at the end to own the car.
Pros:
- An affordable way to drive a brand-new car.
- Fixed monthly payments and fixed terms.
- You don’t need to worry about depreciation because you’ll not own the car.
- Many dealers offer servicing and maintenance packages too.
Cons:
- You’ll have to pay damage charges if the car’s condition goes beyond ‘general wear and tear’.
- You’ll have to stay within an anticipated annual mileage or face charges.
- You will never be able to own the car.
- There is a termination fee to pay if you want to end the deal early.
Get a FREE finance quote!
Our fantastic car finance lenders can offer both Hire Purchase and Personal Contract Purchase deals! Make a free, no obligation application today and one of our team will be in touch with a decision for you!