Buying or renting a car is a huge cost, especially when there is a need for a loan. Picking the right offer will give you great savings. Here, we will briefly consider the advantages and disadvantages of various types of car financing.
With this knowledge, you will be able to select which one is most likely to work for you. Thereafter, there is a bit more research for you to do, some quotes to get, and then, you make your final decision.
Hire Purchase (HP)
To kick off, let us explore the most favored type of car finance – Hire Purchase. This used to be the way most of the people bought their cars.
Having found the car that you want, you find a company that will give you a loan and buy it. The car loan is in fact a security on the car, hence you do not own the car in full until the last payment is made. Therefore, you are not expected to alter or trade it.
In the event of default on the payments, the finance company will repossess and sell the vehicle. Once they receive enough money to cover your debt, which includes both admin fees and the interest that you agreed to pay them, that is that. If the amount raised is not enough to do so, then they will invoice you for the remaining.
The vehicle is yours once you make the final payment. In that stage, you can retain it, modify it, or sell it.
They are easy to arrange and almost everyone will qualify provided they have a reasonable credit rating. The other thing is that it is a rather simple task to calculate the amount that one has to pay for borrowing money.
PCP Car Finance i.e. Personal Contract Purchase
PCP car finance shares a lot of similarities with a Hire Purchase loan. It also consists of three parties namely; the buyer, the car retailer, and the finance company.
However, there is a key distinction. After the period of the contract and the last amount, a buyer can elect to own. They can settle the balloon payment and buy full ownership of the car, re-finance and take that money to buy another vehicle, or simply surrender the keys. Choosing the third variant means that the customer hired the car during this period rather than buying it.
Normally, when you go for the PCP option, your monthly repayments will be less. This makes it cheaper. However, since you are likely to be returning the car at the close of the agreement, you have to be extra careful with the car. Otherwise, you will be charged for the overuse of the car.
The contract also usually includes a restriction on the maximum number of miles you can drive during the contract period. If you go over that pre-determined amount you will be charged surplus as well. The cost per mile will be specified in the agreement.
Different Kinds of Car Financing
The above is the two most popular types of car financing but there are other forms. Most of these are structured to assist individuals who will find it hard to qualify for either PCP or HP agreements. For example:
· Young drivers
· Provisional license holders
· Individuals with a low credit score.
· Customers who wish to refinance/rerate a car loan for lower monthly repayments
· Those who have been refused vehicle finance in the past
· Benefit claimants
If any of these cases have you, the best to investigate will be HP and PCP. This is because in most instances the interest and fees you pay is lower than it is for the other specialist car finance products above.
Whichever alternative you select, always take time to read the fine print and inquire about anything that you cannot understand. It is also important to calculate what will the final cost of each choice be to find out the total amount that you will really pay for your new car.
