Illustration by Arnu
So you've just come from our previous blog post about car financing and have decided to finance your car. Read on to find out about the various types of car financing, and their pros and cons to figure out which one suits your circumstances best!
With a hire purchase plan, you pay a deposit at the start of the term and then pay monthly instalments. The amount you pay every month is dependent on the amount you pay as a deposit. You do not own the car until your final payment is made, and you can pay off the entire balance at any point in full, subject to a settlement figure provided by the lender.
Is Hire Purchase right for you?
Well if you tend to grow some level of attachment to your vehicle and owning it at the end of term means something to you - then this is a great option! It is also perfect if you tend to drive everywhere as there are usually no limits on things like this or mileage. Just make sure you maintain your payments so that the car doesn’t get repossessed!
Personal Contract Hire (PCP)
This is similar to Hire Purchase, where you set a payment plan and make monthly instalments towards the value of your car. However it differs as the last payment does not mean the car is yours. You could choose to keep the car, and pay a large sum at the end called a “balloon payment”, or you can return it. It’s almost like a friends with benefits situation - no strings attached!
There is also a mileage allowance, and you are expected to keep your car usage below the agreed upon mileage. You are liable to pay any cost of devaluation the car may incur, such as high mileage or damage.
Is PCP right for you?
If you have commitment issues and think you’d want to switch up in a few years’ time, PCP is perfect for you. You get the benefit of a spread out payment without being bound to the vehicle. It is also good if you like having the latest, newest car model.
This is essentially a regular loan that is taken from a bank or lending institution and used to pay the car value in full. Then, instead of paying the car company you are paying off the loan in full to the lending company, with bank interest rates. It is not secured against the car itself, such as with other methods of car finance.
Is a Personal Loan right for you?
With a personal loan you could have more options for cars to buy, and this could help protect you from depreciation. Check out the last point of our previous car finance blog to learn about how car depreciation could lose you any potential profit.
A personal loan allows you to buy the car at whatever good deal you can get, and then you can resell it at any time for a profit! If you are accounting for resell profit then this is a good option for you, especially if you trust your knowledge on cars.
Similar to a personal loan, it is apart from the car dealership. You are taking out a loan to pay for the car, and then paying monthly instalments to the bank or lending institution. However there is a guarantor involved, and usually these are opted for where someone has a poor credit rating or bad borrowing history. The guarantor would be obligated to step in and pay if you were to fail to cover your own payments.
Is a Guarantor Loan for you?
Well if your dad owns a house and would be willing to step in - go for it! This is a good way to rebuild your credit score, so if you really wanted a car and were struggling to secure any other finance method, guarantor loans could be for you.
Hopefully this gave you some insights on the various types of car financing options, so that you can make an informed decision when buying your next car! Don’t forget to check out our previous blog post to learn more about car finance itself, and what it could mean for you.
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