Which type of car finance should you choose?

If you’re buying a new car, you may already know you want to go down the car finance route to fund it. It can be hard for drivers to save up enough money to pay for a car with one lump sum payment so more drivers than ever are turning to some form of finance or credit to help them on their way.

Car finance can come in a number of different forms and more than one agreement can be offered by a dealership. If you’re confused as to which agreement would be best, the guide below looks at the most popular ways to finance a car and helps you decide which would be best.

What is car finance?

Car finance is when a lender agrees to give you the money to buy a car or buys a car from a dealership on your behalf. You then agree to make monthly payments back to the lender over a term which suits you. Usually, people spread their finance deal over 3-5 years and you adjust the term length to suit your budget.

Choosing a longer 5-year term will reduce your monthly payment but it may increase how much interest you pay overall. Not everyone who applied for finance will be accepted and you will need to meet the lenders criteria first to see if you are eligible. Usually car finance instant decision deals are offered though s there’s no waiting about for an answer.

Which types of car finance are available?

One of the best things about getting a car on finance is the flexibility of it all. There are multiple agreements to choose from, you can choose a term which suits your budget and you can get the car you want!

The 3 most popular finance agreements in the UK are hire purchase, personal contract purchase and personal loans. Each one is completely different so take some time to review the below and choose which is best for you. 

Hire purchase car finance.

One of the simplest ways to finance a car is by using hire purchase. Hire purchase is a secured loan which means the value of the loan is secured against the vehicle and possession lies with the lender during the agreement. You choose a car and the lender buys it from the dealer for you.

The value of the car and any other fees such as insurance and the interest are split equally over the loan term. At the end of the deal, there’s a small option to purchase fee to pay and the car is yours to own and keep! 

Personal Contract Purchase.

Personal Contract Purchase is actually a form of hire purchase but it can be a little more complicated. It is a secured loans and the lender doesn’t own the car but you’ll not be eligible to own the car at the end of the deal with a simple small payment. Instead, there are multiple options at the end of your agreement. PCP deals are popular because they offer low monthly payments and more flexible options.

Instead of equally splitting the loan over the term, only part of the loan is split into monthly payments, At the end of the deal, there is a large balloon payment to pay if you wish to keep the car. If not, you can hand the car back to the dealer or use any positive equity in the deal towards a new car on PCP. 

Personal loans.

A personal loan is not a secured loan and instead gives you the freedom to go and buy a car for yourself. If you get accepted for a personal loan, the amount you wish to borrow gets deposited into your bank account. You then pay back the loan over your chosen term in monthly payments.

You can use the loan to go and buy a car from a dealer or private seller, just like a cash buyer! You’ll take ownership of the car from the start and there’s no restrictions. If you sell the car before your loan term, you’ll still need to meet the repayments or you can use money from the sale to pay off the finance.