Best type of car finance agreement

More people than ever are choosing to get their next car on finance, with over 80% of cars in the UK financed or leased.

But why are so many people choosing to finance their next car? Car finance enables drivers to spread the cost of owning a car into affordable monthly repayments.

You can usually get a better, newer car than you would than paying with cash and break down the cost into payments that suit you.

But if you’re new to driving, looking for your first car or have never taken out finance in the past, you may be wondering which type of car finance is best. 

In the UK, there are 3 main types of finance that are most popular. These finance agreements are hire purchase, personal contract purchase and a personal loan.

All 3 allow the customer to split the cost of finance into monthly payments, with added interest until the end of an agreed term.

Each agreement has different terms and may suit some people more than others. Let’s take a look at each and the key things you should consider. 

Personal Contract Purchase (PCP)

Personal Contract Purchase is a form of hire purchase. It’s one of the most popular choices for car finance because it enables the customer to benefit from low monthly payments and have more flexibility at the end of the agreement.

PCP car finance deals only cover the cost of the depreciation that will be lost during the contract.

This helps to make PCP affordable with low monthly payments. The car is owned by the finance company throughout the agreement and then the customer has 3 choices to make, they can: 

  • Hand the car back to the dealer and the deal has ended
  • Pay the large balloon payment and keep the car
  • Use the resale value of the car on a new car with a new PCP agreement

You should also note that in most cases the car will end up back with the dealer, so you are required to keep the car in good condition throughout and within the agreed mileage limit.

If you fail to do so, you can face additional charges at the end of the agreement. 

Hire Purchase 

Hire purchase is a lot more straightforward than PCP deals. You are essentially hiring the vehicle from the lender until the final payment has been made.

You take out a loan with the lender that covers the cost of your chosen car and pay it back in monthly instalments with interest.

Hire purchase is a secured loan which means the lender owns the car until you make the final payment.

Unlike PCP car finance, the final payment tends to be lower and around the same amount as your monthly payments.

Hire purchase tends to have higher monthly payments but can be more suited to a range of people, including those with bad credit.

There are no mileage restrictions within hire purchase so you can use the car as much or as little as you like. 

Personal loans

Personal loans can be a great option if you’re looking for a form of low rate car finance.

Personal loans can be provided by banks and building societies, but they can also be found online through finance brokers.

Personal loans can be used for anything, you apply for a certain amount and then if accepted, it is deposit into your bank account.

This gives you the freedom to shop around for the car you want. Personal loans can be more suited to those with better credit score and may not be suitable if you have a bad credit.

Loans can be attractive because you can buy the car outright, there are no mileage charges, you own it straight away and you can make any modifications you like.

You are free to sell the car when you like but you will still need to make the repayments if you sell the car before the agreement has ended.

Which is best? 

As detailed above, car finance agreements can suit different people better. For example, if you have bad credit, you may be more likely to get accepted for a hire purchase loan.

This is due to the lender owning the car throughout so if you fail to meet repayments, they have the power to take the car off you.

If you have good credit but lower monthly affordability, you could consider a PCP car finance deal due to the affordable payments and more flexibility.

Personal loans offer low rates and there’s no restriction on the car you get or where from so could be the most beneficial option in the long run.

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