If you’re in the market for a car on finance, you’ll not want to spend more than you need to. Whilst car finance can be very cost-effective, choosing the wrong finance agreement or not doing your research first can make financing more expensive than it should be.
In the UK, there are 3 popular ways to finance a car. They are a Hire Purchase deal, a Personal Loan and a Personal Contract Purchase agreement. Car leasing isn’t a form of finance but the financial viability of car leasing in the UK should be explored too. Let’s look at each car finance agreement in more detail.
Personal Loan
A personal loan is an unsecured loan, which means there’s a guarantor or collateral involved. It’s not fixed against anything, and you can use a Personal Loan for a range of buying options. If approved by a lender for a personal loan, the money you request gets put into your bank account, usually on the same day! You can then use the money just like you’re buying with cash. You’ll make monthly payments back to the lender over the term you agreed on when you took out the deal. Personal Loans can be spread over 1-7 years but if you sell the car before the finance term is up, you’ll still have to continue to make the repayments.
Hire Purchase
Hire Purchase is a secured loan which means the lender buys the car on your behalf from the dealership. Hire Purchase cars are owned by the lender over the course of your agreement until a final option to purchase fee is paid. Hire Purchase is one of the simpler ways to finance a car and it’s easy to understand. The loan amount, any interest, and additional fees are split into equal monthly payments over the course of the term. Payments and interest rates are fixed too so you always know what you’ll be paying. Once you’ve made all payments on time and you’ve come to the end of the agreement, the car is yours to own and keep.
Personal Contract Purchase
Persona Contract Purchase is another form of secured loan, but it has a different structure to that of Hire Purchase. It’s a popular option for drivers because it offers low monthly payments, even on brand-new cars. PCP deals can offer small monthly instalments because the agreement doesn’t spread the loan into equal payments. Instead, you pay off part of the loan’s value and then at the end of the deal, there’s a large balloon payment. You only need to pay the balloon payment if you wish to keep the car. PCP deals are popular because they offer more flexibility to drivers. At the end of the deal, you can choose to pay the balloon and keep the car, hand the car back to the dealer or use any positive equity in the deal towards a new car on a new deal.
Which is Cheapest?
It’s hard to say which finance deal is the cheapest you can get. If you’re solely looking for cheap monthly payments, PCP deals can be the way forward. Personal Loans may be the most cost-effective though as they can offer low rates of interest which help to make your overall deal cheaper.
Not everyone who applies for finance will be offered the same deal either. Your car finance will be tailored to your personal situation. Having a good credit score can make it easier to be accepted for finance and get you the lowest rates of interest. Your affordability and monthly budget will also affect the deal. Borrowing a higher loan amount with hire purchase will make your monthly payments more expensive.
Does a deposit make car finance cheaper?
In short, yes, a deposit contribution does make finance cheaper. When you put down a deposit for car finance deal, you are reducing the loan amount and making it smaller. A smaller loan can mean cheaper monthly payments or make it easier for you to pay off the loan faster. A shorter loan term can get you a lower rate of interest from the lender because you are taking less time to get their money back to them.
Can I get 0% interest car finance?
Your car finance deal could be cheaper if you get a 0% interest rate deal. However, many brand-new cars come with 0% to pay but they have higher monthly payments than other options so whilst you’re saving on interest, you may not be saving on your monthly payments. It can be hard to get 0% interest on second-hand cars because there’s little money for the lender to make here. A car finance deal with no interest to pay may be harder to obtain when you have bad credit. These deals are usually reserved for the best of the best and those with ‘excellent’ credit.
