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4 types of car finance you should consider

Choosing How To Finance Your Car Is Never Easy, So it's Good To Get All The Info You Need. Here We Explain The 4 Most Popular Forms Of Car Finance.

Mar 11, 2014

4 types of car finance you should consider

If you're thinking of buying a new car, deciding how you finance your purchase is one of your major decisions. Recent figures from the Finance and Leasing Association show that almost three quarters (74 per cent) of private new car sales used some form of finance and there are lots of different types of scheme that you can choose from. To help you, we've put together a guide to four of the most popular types of car finance. Keep reading to find out more.

Hire purchase

Hire purchase is often arranged through the dealer that you buy the car from. The money you borrow is generally secured against the car which means that you typically won't own the vehicle until you've made your final hire purchase payment. You will have to put down a deposit and this can either be in cash or it may be a vehicle if you are part-exchanging your existing car. You then pay the rest of the hire purchase finance in fixed monthly repayments over the term of the contract. At the end of the contract, you own the car.

Personal contract purchase

Under a personal contract purchase plan (PCP) you choose your car, how much deposit to put down and the term of the contract. You also stipulate a maximum annual mileage limit. The dealer also gives you a 'guaranteed future value' figure (sometimes called a 'balloon payment') which is the value of the car at the end of the PCP agreement. Your monthly repayments are based on the difference between the purchase price of the car and the guaranteed future value. In effect, your repayments cover the depreciation in the value of the vehicle during the PCP term. At the end of a PCP agreement you can choose to pay the 'balloon payment' and keep the car. However, you don't have to. Instead, you have the choice of handing the car back to the finance company with no further obligation or you can trade your car in and start a new plan. PCP can be a cost effective way of funding a new car because your monthly repayments only cover the depreciation in the value of the car. You're not paying back the total value of the vehicle. Bear in mind that you will never own the vehicle unless you pay the balloon payment. And, if you exceed the annual mileage limit or you hand the car back in a poor condition you can face significant additional charges at the end of the agreement.

Car leasing

Car leasing is similar to a personal contract purchase. Under a car leasing contract you pay a deposit (typically three to six months payments) up front. You then pay a fixed monthly sum for the duration of the lease. Most leases are between two and five years long and at the end of the lease you can simply return the car to the leasing company. Under a lease agreement you generally don't have the option of buying the car at the end of the term. A lease means that you don't have the hassle of selling the vehicle at the end of the agreement. And, you can often include a servicing and maintenance contract to cover repairs to the car during the lease period.

A personal loan

Personal loans are widely available through banks, building societies and other financial institutions. Here, you borrow a sum of money and pay the entire amount, plus interest, over a number of fixed monthly payments. Most personal loans are 'unsecured'. This means that they are based on your credit rating and your ability to repay rather than the lender taking your car or home as security. When you buy a car using a personal loan, you never owe the car dealer any money and you become the owner of the vehicle from the outset. Personal loans can charge high interest rates, especially if you don't have a perfect credit rating. It is also worth bearing in mind that your monthly repayments may be higher than other types of finance because you're paying back the whole amount of the loan over a fixed term. 4 types of car finance you should consider

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