Which Type of Car Finance is Right for You?

Which Type of Car Finance is Right for You?

 

In today’s society, there are so many different types of car finance out there; that it can be difficult to know which one is right for you. It’s never been easier to get the car of your dreams, but you have to make sure that you can afford the repayments and you understand the finance agreement, or you could end up with a lot of debt.

PCP

Personal Contract Purchase agreements structure monthly repayments into affordable amounts, which can sometimes be even less than £100 a month. You will have to pay a deposit and then at the end of your contract (which usually lasts for 3-4 years) you have the option to make one final balloon payment which was agreed at the start of your contract to keep the car, or simply hand it back to the dealership. Many dealers are able to offer PCP agreements on brand-new cars, which can sometimes make a new car even more affordable than a used one. This is because dealerships are so keen on new car sales that they will offer low deposits and other incentives to encourage people to sign up. Every car depreciates in value over time, and this is essentially what you pay for on a PCP agreement, rather than the car itself. The dealer will always know what the car will be worth at the end of your agreement, and this is known as the Guaranteed Minimum Future Value – based on the age of the car and the mileage. You’ll be charged if you go over your mileage limit that you agree with the dealership, and if you want to change your car after two years, you shouldn’t finance it over three as you may have to cover the difference.

Advantages:

  • Lower deposits and lower monthly repayments.
  • You can drive a new car every three years without paying a full deposit.
  • New car warranties last for three years, so if you go for a three year agreement, you will always be covered by the warranty.
  • Dealerships get competitive, so they are always offering different incentives like deposit contributions and 0% interest.

Disadvantages:

  • Some people don’t like the idea of making payments for three years with nothing to show for it at the end.
  • Some incentives are only available for certain engines or models.
  • You can leave before the agreement is up, but there will be fees involved.

Leasing

Leasing a car is another way to make a brand new vehicle affordable. Like PCP, you won’t own the car, but unlike PCP, you will never need to worry about depreciation or tax, or even maintenance if you take out a maintenance agreement. With leasing, you will make an initial payment followed by monthly repayments over a certain period of time. At the end of the agreement, you hand the car back to the leasing company without having to pay anything extra. The initial payment that you make on a leasing agreement is usually a multiple of 3,6, 9 or 12 of the monthly repayment amount. You will agree a mileage with the leasing company, and be charged if you go over that mileage. The vehicle is owned by the finance company, and you’re the registered keeper, so you can’t make any modifications without permission. You should always make sure that you know the costs of leasing upfront – a good leasing company will never hide any costs from you.

Advantages:

  • Leasing makes a brand new car more affordable.
  • It’s ideal if you like to change your car regularly and always drive the newest model.
  • You can include a maintenance package to cover minor repairs and servicing.

Disadvantages:

  • You will never own the car.
  • You can’t make any modifications to the car without permission.
  • You will be charged if you go over your agreed mileage.

Bank Loans

Several banks in the UK offer their own types of car finance. This can sometimes be cheaper than going through a dealership, and it means that you can walk into a showroom knowing how much you can afford and how much you will be paying back every month. You can have the money transferred to your account straightaway once you have signed up, so you can use this to bargain with the dealership for a better value contract. Some banks will offer incentives like a payment holiday, and a price promise guarantee – so if you find a better rate deal, they will beat it – but most banks don’t include dealerships in their price promise.

Advantages:

  • You can have the money in your account before you visit the showroom, which gives you better bargaining power.
  • Banks offer incentives like payment holidays, and you might get a preferential rate if you are already a customer of that bank.
  • Most banks will let you pay your loan back early – you’ll just need to pay any outstanding interest.

Disadvantages:

  • Although banks offer a price promise, they often don’t include dealerships, so dealer finance could be cheaper.
  • The interest rate that you’re offered can vary depending on your credit history and financial circumstances.

There are plenty of options out there to help you finance a car. You’re no longer stuck with an old banger if money is tight, but you have to be careful. Always make sure that you know the costs upfront, and never borrow more than you can afford. If your budget is more Fiat than Ferrari, don’t overestimate what you can afford as you can get yourself in a lot of trouble and your credit score will be affected if you default on the finance payments.

 

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