When it comes to purchasing a car, many people turn to car finance as a means of spreading the cost over a period of time. Car finance can provide the opportunity to buy a car that you might not be able to afford outright, and it can also allow you to upgrade to a newer model without breaking the bank. However, car finance can be a complex and confusing subject, with a variety of different options available. In this article, we will explore the various types of car finance and provide some tips on how to choose the right option for you.
Types of car finance
There are several different types of car finance available, each with its own benefits and drawbacks. The most common types of car finance are:
- Hire purchase (HP): This is a type of car finance where you pay a deposit (typically 10-20% of the car’s value) and then make monthly payments over a period of two to five years. Once you have made all the payments, the car belongs to you. With HP, you are essentially hiring the car from the finance company until you have paid it off in full.
- Personal contract purchase (PCP): This is a type of car finance where you pay a deposit and then make monthly payments over a period of two to four years. At the end of the term, you have three options: you can pay a final “balloon” payment to own the car outright, hand the car back to the finance company, or use any equity in the car as a deposit on a new car. PCP can be a good option if you like to change your car frequently, as it allows you to upgrade to a newer model every few years.
- Personal loan: This is a type of loan that you can take out from a bank or other lender to buy a car. You borrow the money and then make monthly payments over a period of two to five years. Once you have paid off the loan, you own the car outright.
- Lease: This is a type of car finance where you pay a monthly fee to use a car for a set period of time, typically two to four years. At the end of the lease, you hand the car back to the finance company. Leasing can be a good option if you want to drive a new car without the hassle of ownership, but it can be expensive in the long run.
Choosing the right car finance option
When it comes to choosing the right car finance option, there are several factors to consider. These include:
- Your budget: Before you start looking at cars, you need to work out how much you can afford to spend on monthly payments. This will help you narrow down your options and ensure that you don’t overstretch yourself financially.
- Your credit score: Your credit score will play a big role in determining the interest rate you are offered on car finance. If you have a poor credit score, you may find that you are only offered high-interest loans, which could make car finance more expensive in the long run.
- The type of car you want: Different types of car finance may be better suited to different types of car. For example, if you want to drive a new car every few years, PCP may be a better option than HP. If you want to own the car outright and keep it for a long time, HP or a personal loan may be a better choice.
- The length of the finance agreement: The longer the finance agreement, the lower the monthly payments will be, but the more interest you will pay in the long run. You should aim to pay off the car as quickly as possible to keep the overall cost down.
- The total cost of the car: You need to take into account the total cost of the car