Car Finance - Your options
What are the different types of car finance?
Are you thinking about borrowing to buy a car but feel driven to distraction by all the options out there?
Are you a first-time buyer wanting a car that will last and not just a runaround?
It could be that your current car is reaching the end of the road but the cost-of-living crisis has affected your cash flow.
Maybe it’s that you have surplus income for monthly payments and fancy an upgrade.
Whatever the motivation, there’s a finance option for everyone and we’ll guide you through the minefield.
But before we completely rule the cash option out, let’s consider the benefits.
Using cash means you won’t have monthly payments to make, and if you do run into financial difficulties, you don’t need to worry about the car being taken off you if you can’t keep them up.
The downside is, if you announce you’re paying cash, you may not be offered discounts you’d be given if you took out finance, since salespeople are given commission for this.
You may also be asked to pay by bank transfer, which means you won’t get the same protection as you would with a credit card. The way to get round this is to use a credit card to put a deposit down then pay the balance by bank transfer.
Even if you’ve only paid for part of the car with a credit card, you’ll be covered by Section 75 of the Consumer Credit Act 1974. This holds the lender liable along with the retailer if something goes wrong with a purchase of over £100 and less than £30,000.
If you really don’t have the cash, or would rather save any nest egg for other priorities, such as a deposit on a house, then a range of finance options are available.
Hire Purchase (HP)
HP is a fixed interest loan, secured against the car, usually paid monthly over 1-5 years. As the registered keeper, you pay to maintain, insure and tax the car – but you won’t legally own the car until you’ve made your last payment.
- You can part exchange your current car to pay for the deposit.
- The dealer will sort out all the paperwork for you.
- You can repay the loan early.
- APR is fixed so your payments will stay the same.
- HP agreements are regulated.
- You won’t own the car until you finish paying for it.
- You can’t sell or modify it without asking permission from the finance company.
Personal Contract Purchase (PCP)
This is like HP except that it takes depreciation into account, i.e. what your car will be worth at the end. The payments are split into three sections – deposit, monthly payments, and option to make a final payment at the end. The monthly amount is based on the Guaranteed Minimum Future Value (GMFV). This is what your car is calculated to be worth at the end of the agreement, taking into consideration factors such as the age the car will be and estimated mileage.
- Your monthly payments are likely to be lower than with HP.
- You can make the final payment and keep the car, trade the car in as a deposit for a new car and finance agreement, or you can just give the car back and walk away.
- You can choose to settle the agreement early.
- PCP agreements are regulated.
- If you exceed the estimated mileage you have to pay a charge.
- You will be charged for any damage to the car.
- If you enter into a Business Contract Purchase (BCP), the finance agreement may be unregulated, so you won’t have the same protection as consumers.
This allows consumers, business owners and sole traders to lease a car, usually a brand new one. The overall amount payable is based on how much the vehicle loses value over the term of the agreement, plus interest and any other applicable charges. At the end of the lease term you hand the car back.
- Monthly payments will be less than the same car on HP.
- Monthly payments are fixed, and can include tax, servicing and maintenance.
- Sole traders and businesses can claim VAT back on monthly payments.
- You can get a new car every few years.
- If you exceed the estimated mileage, monthly payments will increase.
- If the lease is for business you don’t get the same protection consumers do.
- You will be charged for any damage.
- You will never own the car.
- Early termination charges may apply and be high.
This is similar to Contract Hire, with the same pros and cons – except you pay a final, larger amount, known as a ‘balloon’ payment to own the car. There is no option to give it back.
Equity release or remortgage/mortgage top-up
If you have equity in your house, you could use it to buy a car.
- With equity release, you will not make monthly payments, the debt will be paid out of your estate when you die.
- With a remortgage or top-up, the amount will be spread out over the term of your mortgage, so the monthly payments will be less than with a car finance agreement.
- Overall, you may pay a lot of interest.
- If you sell the car, or it breaks down and is uneconomical to repair, you’ll still have to pay for the loan. Either through monthly payments or it will be taken out of your estate when you die.
- You’ll own the car from the start, but it will be a depreciating asset, i.e. it won’t be worth what you bought it for by the time you’ve finished paying for it.
- You need to be sure you can keep up the payments for the length of the loan term.
A car loan is usually taken out over 1-5 years, with fixed payments, so you can spread the cost out. The cons are the same as with a remortgage/top-up, see above.
And finally, you could use a credit card. If you have good credit, a reasonable credit limit and even better, can benefit from a 0% interest offer on purchases, this could be a good option and provides you with Section 75 protection.
But this could also be a very risky option if you later fall on hard times and the interest rate increases, or you can’t afford to keep the payments up.
Whichever option you choose, make sure you’ve considered the risks carefully before you take the plunge. Do your research and be 100% sure you know what you’re committing to.
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