Drivers are spoilt for choice when it comes to car finance options and it can be hard to know which is best for your situation. You may also may be suitable for one finance agreement over the others so our guide below has been designed to help you on your way to car finance. In the UK, the most popular ways to finance a car are through Hire Purchase, Personal Contract Purchase and a Personal Loan. Each type of finance has its own structure, criteria and how they are offered to customers. Take the stress out of car finance and learn how each finance deal works and decide which may be right for you.
Personal Loan
The easiest and most straightforward of the car loans UK you can get is the personal loan. ‘Personal’ loan means its unsecured and there’s nothing in the deal used as collateral. It’s when a lender agrees to loan you a set amount of money over an agreed number of years and you make monthly payments back to them. The beauty of a personal loan is that it can be used for anything from buying a car to home improvements, the lender isn’t fussed about what it’s used for. Once you’re approved and the lender puts the money in the bank, you can go buy a car just like a cash buyer! You’re not restricted to where from and can shop for cars from dealers and private sellers. Buying this way also means you’ll be the owner of the car, which means you can modify and sell the car as you wish.
Hire Purchase Car Finance
Unlike a personal loan, Hire Purchase car finance is a secure loan which means the lender owns the car you get on finance. If a lender agrees to offer you HP finance, they’ll buy your chosen car from a trusted dealership on your behalf. You then make the agreed payments back to the lender until the end of the term. A secured loan means the lender has the right to take the car off you if you fail to repay. At the end of the deal and once all payments have been made on time and in full, there’s only a small option to purchase fee to pay and then you’ll take ownership of the car. Hire purchase deals can be worth it if you intend to own the car at the end of the deal and want a straight forward finance agreement.
Personal Contract Purchase
Personal Contract Purchase or PCP is also a form of secured loan which means you won’t own the car during the agreement. PCP can offer lower monthly payments than other options because the payment plan isn’t split equally. Instead, part payments are made towards the car and then a final balloon payment is at the end of the deal. If you want to own the car, the balloon payment will need to be paid. You can do this outright or refinance a PCP balloon payment with a new lender. However, you can also choose to hand the car back to the dealer or use the value towards another car on PCP. Drivers like the flexibility of PCP and it makes it easy to get a brand-new car but with low monthly payments.
Which car finance deal is best?
Determining which car finance deal is best for your situation can depend on what you want out of your deal. We think there 3 deciding factors to which agreement is best.
1. Budget
If your sole focus is getting a car with the lowest monthly payments possible, PCP deals will usually come out on top. Due to the structure, smaller monthly payments can be made because much of the cost of the loan is waiting at the end of the deal in the form of a balloon payment. The only (big) drawback is the large balloon payment would need to be paid to take ownership of the car.
2. Car Ownership
Many people who take out PCP and HP cars feel like the car isn’t there’s until the end, which is correct as the lender owns the car during the agreement. If owning a car is important to you, then a Personal Loan could be your best bet. They usually come with low interest rates too so you can save on your deal also.
3. New vs. Used Cars
Car finance can be used to get both new and used cars. However, what’s available to you may be determined by the type of agreement you choose. PCP deals can make brand new cars affordable because you only pay off part of the loa during the agreement. However, they can also be used on used cars too.
