Purchasing a car in the UK, or anywhere else in the world, is no small expense. The best part is that car finance is there to bring to life your dream of driving away in the car you love without having to worry about the initial expense.
But don’t get too carried away before you do that. You may want to learn about the various finance options out there, their pros and cons, if any, so that your decision won’t be a regretful one.
Understanding Your Options for Car Finance
Car finance is available in several methods of paying for a car purchase, most of which defer the cost over time. The most popular types include the following:
- Personal Contract Purchase (PCP)
With PCP, you make an initial deposit plus monthly payments which pay off the car’s depreciation over the course of the agreement. You then have the option to make a final ‘balloon payment’ at the end of the agreement to retain the car, hand it back, or trade it in for a new one.
- Hire Purchase (HP)
You pay a deposit and subsequent fixed monthly payments with HP. The car becomes yours after you’re done with all the payments.
- Personal Loans
Personal loans involve borrowing a lump sum from a lender so you can buy the car outright and then repay the loan in monthly payments. You own the car from the very beginning, which gives you flexibility in usage and alterations.
On the flip side, if you are interested in finding out if a vehicle is currently on finance, you can do so with a car check. This history report will provide the finance agreement details, including the number of months left, the finance company, and the agreement date. This information is valuable if you just want to check or if you are buying a car and want to make sure the vehicle is finance-free.
Perks of Car Finance
• Affordability: Financing makes it possible to buy a newer or better car that you will be paying for in a span of several years. It means that cars that used to be out of your reach can be yours in no time.
• Fixed Payments: Majority of the car finance deals you can get your hands on right now have fixed interest rates with regular monthly payments. This means that you can stick to your budget without any problem.
• Flexibility: Cars such as PCP offer end-of-term alternatives, allowing you the freedom to decide whether to keep the car, return it, or upgrade to a new one.
• Credit Building: Regular, on-time payments will enhance your credit score, potentially leading to more favourable loan conditions in the future.
Drawbacks of Car Finance
• Interest Charges: Interest always comes hand in hand with car financing, which will potentially add more to the price of the car.
• Depreciation: Vehicles lose value over time, and with certain finance deals, you may end up paying more for the vehicle than it is worth if you break the agreement early.
• Limitations: Some contracts, particularly PCP, may include mileage limitations and vehicle servicing requirements. Overriding these or failing to comply with them will mean extra costs for you in the long run.
• Delayed Ownership: Under arrangements such as HP and PCP, you won’t technically be the vehicle’s owner until payment has been completed. It also restricts your right to alter or dispose of the car within the agreement period.
Recent Developments in Car Finance
It would work in your favour if you keep up with the recent trends as far as car finance is concerned. There were concerns about car finance plans where customers were not adequately informed of the charges and interest rates, resulting to excess payments along the way.
These practices are now being investigated by the Financial Conduct Authority (FCA), and there have also been major court decisions on a lack of transparency in certain car finance arrangements.
Conclusion
Ultimately, the final decision depends on your current situation. If you have the money on hand for the vehicle of your choice, we recommend a cash payment. However, if your finances do not allow for a cash payment, then of course, you will have no choice but to take out finance.
