Cars are expensive and interest rates are as low as they have ever been. Whilst using cash to purchase a car is often preferred, it’s not always possible. So, here is the guide to financing your dream car and the traps to avoid, before touching on a brief car financing guide for businesses.
Before starting, it’s important to remember that when purchasing with credit, credit scores are important. The better your credit score, the better the deal you can hope for. It’s also important to remember that a good credit score may mean you can borrow a large amount – however, this doesn’t necessarily mean you can afford the repayments, as this must be a calculation you must make on your end.
Types Of Car Financing
There are many ways to go about purchasing a car with borrowed money. Not just where the funds are sourced from, but the implications it has on ownership, charges, customer rights, and limitations of your car-driving freedom.
Personal loans can range greatly in contract terms depending on where you get them from. A personal bank or building society loan can often be the cheapest form of finance, but you will need a good credit score. Furthermore, monthly repayment options can often be greater than other financing options despite a cheaper APR and cheaper total costs.
The biggest advantage of using personal loans is that you will own the car from the offset – something that is often a criticism that car financing lacks.
Another way to finance a car whilst owning the car from the offset is to use P2P loans. These aren’t specific to buying cars, meaning the cars aren’t necessarily going to be used as security to lower the cost of the loan. The interest you pay will heavily depend on your credit score, and will almost certainty be higher than personal loans. However, they’re likely easier to be approved for than personal bank loans.
Hire purchase is a much more common method of buying a car than P2P loans, and is relatively simple in nature. The buyer/borrower pays a 10% deposit for the car, then fixed monthly payments are made over a given time period, say 6 years.
This, like many other forms of car financing, means the car isn’t yours until the very final payment is made. This makes it easier and faster for them to take your car away from you in the event you miss some repayments. This financing is usually set up by the car dealer themselves, and they’ll often give much better rates when buying a new car.
There are often interesting consumer rights (in the UK, at least) when using a hire purchase. Sometimes, upon paying for half the car cost, you can return it and mitigate future payments. It may also be the case that the lender cannot repossess your car once a third of the car is paid off.
Personal Contract Purchase
Also known as PCP, Personal Contract Purchases are slightly more complicated versions of hire purchases. The major difference is that upon your final payment at the end of the contract, you’re presented with a choice instead of owning the car: you can return the car, pay the resale value and keep the car, or use the resale value towards buying a different, new car.
The biggest advantage of PCP is their promotions, which often boast 0% interest or large deposit contribution. Generally, people find these to be more persuasive than hire purchases.
However, creditworthiness assessments are pretty robust with not just a credit risk but an affordability calculation. You will have to stay within the agreed mileage limits otherwise face a charge, and you may not be able to take it abroad. Scratches can also lead to charges, but the deal can end early once you have paid half the car off.
PCP, whilst being more complicated, simply has more consumer choice than a hire purchase which can be important to our ever-changing circumstances in life.
Personal Contract Hire
PCH is a type of car leasing. How this differs to the former two is that you never own the car, or have any intention to at the end of the contract. Because of this, monthly payments can often be cheaper as you’re never paying off a principle. The same robust credit checks will be required, similar mileage limits will be set, but there is one major difference beyond future ownership: servicing and car tax are covered by the car dealer. This means you simply pay your lease repayments and insurance, and your fuel, and that’s it!
The biggest risk is that damages can lead to extra charges, and that none of your payments contributed towards ownership. However, because of the (sometimes) cheaper monthly payments and the short-term nature (meaning risk is lower), this can often be the best way to – albeit temporarily – drive your dream car.
Business Car Financing
Small business owners are in a slightly more unique position of being able to purchase their financed car through their business. This makes calculations more complex, because they can factor in VAT relief (if it’s a brand new car), capital allowances, and whether or not the car financing repayments are tax deductible. There’s a lot of nuance that goes into these calculations, such as whether the car is new, how fuel efficient it is, what it’s being used for and if some use is personal, and so on.
Why You Should Use Cash When Possible
Purchasing a car with cash isn’t always feasible, but it’s advantages shouldn’t be ignored. Purchasing a car with cash means that you will own the car from the offset, unlike PCP, PCH, and leasing. This means that you can customise it, sell it, and do whatever you like to it. Furthermore, you’re not at risk of losing it if you don’t make the repayments and you’re going to pay less in total for the car.
How To Decide Which Road To Drive Down
Hire purchases and PCP can mean getting a better car than with cash – perhaps a new one with competitive rates – and you will have better cash flow in the short-term, too. The consumer rights mitigates some of the disadvantages of not having ownership, and it comes down to whether or not you can make the repayments or not.
Additionally, it comes down to how far you drive, and how likely you are to scratch the car. If you’re prone to knocking your car about, then this will be far cheaper when buying a car with a personal loan under your ownership. Furthermore, financed cars rarely work if you drive a tonne of miles each year.
New cars will last you longer, meaning the opposite is true – if you’re just looking for a 3 to 4 year car, then don’t buy a brand new one on credit as the depreciation and length of the contract is not viable. Though, in the case of wanting only a short-term car and a new one, leases shouldn’t be ruled out.