If you’re in the market for a new car, you know full well that you are about to make one of the biggest purchases of your life. But, forking out for the entire lump sum for most of us is simply not an option. That’s where car financing comes in. Manageable, monthly payments not only open up more choices, but it means you can make your money go further, too.
But knowing your Purchase Contract Plan from your Hire Purchase can make all the difference. With a range of different incentives included, here are 5 things you should know about car finance before taking the plunge:
1. Know your options
Like everything, car financing comes in different shapes and sizes. At its core, taking out finance means that you can afford a newer vehicle with all the mod cons, trims or engine size without the financial hit of fronting up all the cash in one go. But, it isn’t a one size fits all kind of deal. Here, we have broken down the big three, so you know what to expect:
Hire Purchase (HP)
- Secured against the vehicle itself
- You own the car after you’ve made your final payment
- You can’t sell without the lender’s permission, but you can return it
- Typical 10% deposit
- Repay balance in monthly instalments, plus interest
- You own the car outright at the end of the loan period
Things to be mindful of with HP:
- It can prove more expensive than an independent bank loan
- Avoid missing payments – the car can be repossessed
- Servicing may be included
Personal Contract Plan (PCP)
- Typical 10% deposit followed by low monthly instalments
- You can pay a lump sum at the end of the loan period to own the car outright
- You can return the vehicle or sell it privately to settle your final amount
- Perfect for people who like to switch up their vehicles regularly
Things to be mindful of with PCP:
- Penalties can occur if you go above agreed mileage limits
- Car must be kept in good condition
- You are essentially hiring the car until the final “balloon payment” is made
- Less cost-effective than HP overall if you want to keep the car
Personal Leasing or contract hire
- Similar to PCP
- Low monthly payments
- No option to buy the car
- Convenient and easy to upgrade your vehicle
- Overall leasing cost determined by length of contract, type of car and agreed mileage limits
Things to be mindful of with personal leasing:
- Typically have to pay three months rental upfront
- Servicing may be included
- Mileage limits apply
- Be cautious with APR, option to purchase and hidden admin fees!
2. Poor credit score? No problem
If you’ve struggled to be accepted for credit before, or simply have no credit history to speak of, you probably have a poor credit score.
Personal circumstances are often responsible for damaging marks on your score. This could be because you have failed to pay a mortgage repayment, loan or credit agreement as stipulated in your loan agreement. Fortunately, there are a range of specialist lenders out there who are prepared to take the risk.
Bad credit car finance is designed for customers with a poor credit history who need a loan to purchase a new car. In essence, it works exactly like standard car finance, but with a few little tweeks such as the need for a guarantor. Before getting accepted, lenders will look closely at your individual circumstances and build your loan around what you can afford each month.
3. 0% finance deals are available
Sometimes dealerships will offer a 0% finance deal incentive when they are struggling to shift an outgoing or slow-selling vehicle. They come with no interest, so what you see for your monthly payments is what you get.
What most customers don’t realise, is that a large deposit of around 35% is typically required. This is a one of a kind deal, so don’t expect any further discounts.
Yes 0% finance deals are incredibly appealing, but make sure you don’t get swept up in the hype if you can’t reasonably afford the monthly repayments. You might find yourself getting switched to a scheme with a higher interest rate if you fail to pay.
4. Hidden perks
One of the greatest selling points of buying a car with finance is that there are a bunch of perks available that you just won’t find anywhere else.
You can expect servicing as standard for most finance deals. Then there is the manufacturing warranty that covers you typically for at least 3-5 years, minimising high costs at the garage if anything goes wrong and ensuring peace of mind.
Beyond the money saving perks, there are several customisable options available. From choosing the trim to a standout paint job, there’s a lot to like.
5. Additional extras
Ever since the pandemic swept around the globe, the face of the dealership has changed. Despite fewer face to face encounters on the salesroom floor, there are still a bunch of add-ons that dealerships will try to sell you.
On the surface, several of these extras will feel necessary, but like everything, you are likely to find a better price away from the dealer’s commission based sale. Look out for:
Gap Insurance (Asset Protection)
- Covers the “gap” between the current market value of your car alongside the value of your outstanding loan
- Also covers the cost of replacement in case of theft or being written off
Minor Damage Insurance
- Protects the cost of cosmetic damage/minor scrapes
- Protects the guaranteed value of your car upon return
- Everything from tyre protection to cover for alloy wheels may all be put together in an attractive bundle deal. Most of these are available outside of the dealership for a much cheaper price.
With any of the additional extras listed above, third party, independent providers typically offer the same packages for a much more affordable price. So make sure you save yourself some extra cash by checking out all your options ahead of the dealership.
Car finance is the UKs most popular way to buy a vehicle. Make sure you check out all of your options to find the most affordable package for you. What will your next ride look like?