What is car finance?

Car Finance types

  • HP – Hire Purchase
  • PCP – Personal Contract Purchase
  • Personal Loan
  • Unsecured Loans vs Secured Loans
  • PCH – Personal Contract Hire
  • conditional sale

Financing your car with a Personal Loan

With lenders chasing your business, getting personal loans to finance your car purchase has never been easier. Available at the big High Street lenders, by phone or online from direct-sales companies, they offer flexible repayment periods of 2 to 10 years.Interest rates are most competitive for larger personal loans (though still higher than remortgaging).

The big advantage of a personal loan is that it separates the finance deal from the car deal. You can shop where you want – at a dealership, privately, with an online retailer or even at auction – and you own the car from the start.

TIPS:

  • Go for a fixed-rate loan deal, so your monthly repayments don’t vary.
  • Repayment protection covers redundancy, unemployment, sickness and accident. It costs extra but buys peace of mind.
  • Use a low interest credit card to finance small cash sums.
  • Go to OWN OR LEASE? for non-ownership finance plans.

Financing your car via Car loan

Credit products advertised as car loans are generally just personal loans dedicated to the specific purpose of lending money for the purchase of a car.

However, some lenders offer extra benefits that may clinch the deal for you such as free breakdown cover, supermarket points or discount vouchers.

Some people are lucky enough to qualify for another type of car loan – concessionary or subsidised employee loans. These perks are most common in large organisations and the public sector. Check with your personnel or payroll department to find if your employer runs low-cost loan or assisted lease schemes. Conditions can apply – you may have to be an ‘essential user’ of a private car for work purposes

Remortgaging to finance your car


If you’re a homeowner with a property worth more than your current mortgage loan, you can take out a bigger mortgage – possibly at a more favourable rate – and pocket the extra cash. This ‘equity release’ lets you finance a new car, a dream holiday or whatever.

Key Points

  • With low interest rates on home loans, equity release sounds great. But:
  • There can be arrangement, survey and legal fees to pay.
  • You’ll still be repaying the mortgage when the car is a distant memory!
  • Interest rates could rise in the future, leaving you paying more.

UNSECURED LOANS VS SECURED LOANS


Most lending for car purchase is ‘unsecured’ – fixed-rate loans that are not ‘secured’ by a charge over something of value (e.g. property or the car itself) to protect the lender if the borrower defaults on the repayments. This is why credit checks are such an important part of the loan application process.

Lenders who offer ‘secured’ loans usually restrict them to homeowners; equity in the property forms the security. Secured loans allow you to borrow larger sums at lower (and sometimes floating) rates of interest – but you need to be confident that you can keep up the repayments.

What is HIRE PURCHASE (HP)?


Hire purchase or HP schemes have been around almost as long as the motor trade. HP is the most straightforward dealer finance scheme. It’s most common at independent used car dealers, who sell hire purchase packages on behalf of finance companies. Dealers earn commission for this, so may actually be keener to arrange hire purchase deals than to take a wedge of cash.

Hire purchase often looks attractive to less affluent used car buyers who don’t qualify for personal loans. A deposit as low as £100 is followed by fixed monthly instalments (technically hire fees) over a two- to five-year term, and a final ‘purchase option’ payment. Only then is the car yours.

The other common dealer finance scheme is the ‘conditional sale’ agreement. It’s similar to HP but can offer more flexible interest rates and repayment terms. A larger deposit will be required, and the ‘conditions’ are that the car is correctly maintained and insured (in case the lender has to repossess it!), and that ownership only passes to you when you pay the final instalment

INSIGHT

  • Interest rates can be high on low-deposit HP or conditional sale plans. Check the total cost of the plan – deposit + all monthly payments + final purchase option payment – against the price agreed for the car.
  • Go to OWN OR LEASE? for non-ownership finance plans.

What is Conditional Sale?

The other common dealer finance scheme is the ‘conditional sale’ agreement. It’s similar to HP but can offer more flexible interest rates and repayment terms. A larger deposit will be required, and the ‘conditions’ are that the car is correctly maintained and insured (in case the lender has to repossess it!), and that ownership only passes to you when you pay the final instalment

What is PERSONAL CONTRACT PURCHASE (PCP)?


A PCP (Personal Contract Purchase) deal is a very easy way to finance a new car. The whole deal can be wrapped up in the showroom, you don’t need a big deposit, and the monthly payments look temptingly low.

Not surprisingly, PCPs are often sold on their apparent affordability. Buyers put down a small deposit and then make fixed monthly payments for the life of the contract – typically 36 months. These payments are lower than typical loan or HP repayments on a car of the same price, but you’re not actually buying the car. And you won’t own it until you’ve made a final deferred payment, which can be as much as a third of the car’s original new price.

At the end of the contract, you have to choose whether to:

  • Make the final payment to own the car;
  • Simply hand it back – you have really only rented it;
  • Take out a new PCP with the same manufacturer.

INSIDER INSIGHT:

  • A PCP might look convenient and affordable, but…Can you afford a substantial final payment?
  • A new car every three years carries a big hidden depreciation cost.
  • You’re tied to the manufacturer if you ‘roll over’ into a new PCP scheme.
  • Go to OWN OR LEASE? for non-ownership finance plans.