Everything You Should Know About Buying A Car On Finance

Posted on Jul 24 2013 - 5:50pm by Vincent Hill


How should you pay for a car?

In the past, many drivers bought their car using their own cash or used a loan from a bank. Now, though, motorists are increasingly turning to car leasing and contract plan deals when buying a new car. Indeed, the Finance and Leasing Association recently revealed that three quarters of the 699,052 new cars bought in the 12 months to the end of March 2013 had repayment plans sold by dealerships.

If you’re considering buying a car using finance you have a number of choices. So, we’ve put together this handy guide to three of the most popular types of car finance on offer and the pros and cons of each type of deal.

A loan

One of the most straightforward ways of funding a new car is by using a loan. Personal loans are widely available through banks, building societies and even supermarkets. You borrow a fixed sum of money and pay the entire amount back on a monthly basis over a fixed period.

Most personal loans are ‘unsecured’. These are based on your credit rating and your ability to repay and are offered by dozens of lenders. ‘Secured’ loans generally require some form of collateral – often your home or the car itself – which means that the lender can repossess the asset should you fail to keep up your repayments.

If you’re thinking of using a personal loan, make sure you know what the Annual Percentage Rate (APR) is. The APR includes the interest rate and any other fees and helps you to compare loans from different institutions. Generally speaking, the lower the percentage, the better.

By using a personal loan, you never owe the car dealer any money and you can avoid putting down a large deposit. It also means that you become the owner of the vehicle from the outset.

However, personal loans can carry high interest rates – especially if you don’t have a perfect credit rating – and as you’re paying back the whole amount of the loan over a fixed term you’ll generally find that your monthly repayments will be higher than other types of finance.

Hire purchase

Hire purchase is often arranged through the dealer when you buy a car. Your finance is generally secured against the car which means that you typically won’t own the vehicle until you’ve made your final payment.

You will normally pay a deposit of around 10 per cent of the price, although this may include a car if you are part-exchanging a vehicle. You then pay the rest of the hire purchase loan in fixed monthly repayments over your chosen term.

Personal contract hire

Personal contract hire is similar to a hire purchase agreement in so much as you put down a deposit and pay back the loan in monthly installments.

However, a contract hire plan generally has one final lump sum payment at the end of the term (sometimes called a ‘balloon payment’). You can choose to pay this and keep the car but, crucially, you don’t have to. You can hand the car back to the finance company and pay nothing or trade it in and start a new plan.

Personal contract hire is flexible and keeps your monthly repayments low. This is because you are effectively only paying depreciation and interest, and the bulk of the cost comes in the form of the final payment to buy the car.

However, you will never own the vehicle unless you pay the final payment. In addition, if you exceed your annual mileage or you don’t hand the car back in excellent condition you can face significant additional charges at the end of the agreement.

Photo Credit: Flickr/Alan Stanton

About the Author