Car Loans

The Ultimate Guide

What is a car loan?

A car is one of the larger purchases that most of us will make in life, and with so many buying options available it can often be a complex one.

Buying a car outright is always the cheapest way to purchase. For most of us however, this isn’t a viable option. Even when we do have the funds available to buy with cash, we may be hesitant to use up large portions of our savings often set aside for other purchases (like a home).

Luckily there are many different financing options available. A personal loan is certainly one of these, but there are also Hire Purchase deals and Personal Contract Plans which you are likely to offered if going through a traditional dealership.

In this guide we’ll take you through these main options and outline some of the pros and cons that you should consider in each case.

 


 

Buying a car with a Personal Loan

You can take out a personal loan from a bank or lender to cover the cost of buying a car. This allows you to purchase the vehicle outright, while you then pay the lender back for the amount borrowed over an agreed term.

Advantages

  • This means you own the car outright from the day you collect it.
  • You can choose repayments which suit you and spread the loan over a preferred period of time.
  • It can sometimes work out cheaper than dealership finance in the long run.

Disadvantages

  • Favourable rates and loan terms may only be available to borrowers with stronger credit scores.
  • There may be early-redemption fees incurred by paying off the loan early.
  • You are open to bearing the costs of depreciation (as with buying in cash).

 


Buying a car with a Hire Purchase (HP) deal

Hire Purchase is a scheme offered by most dealerships and cars salesmen to would-be customers who don’t want to buy with cash. In essence, a Hire Purchase plan allows the customer to ‘hire’ the car over an agreed period, with the option to make a final payment at the end of the plan to ultimately ‘purchase’ the vehicle.

One of the key differences with an HP agreement is that the loan is secured against the car (unlike a personal/unsecured loan). The car will also only transfer into your ownership once you make the final payment at the end.

Advantages

  • Can be a good option for would-be borrowers that cannot access an unsecured loan (they may have poor credit).
  • If wanted, you can terminate the agreement early and return the car once you have paid at least half the debt off.

Disadvantages

  • You don’t own the car until the end of the term and after you have settled the final payment
  • You’ll normally need to put down a deposit (typically 10%).
  • The loan is secured, so if you fail to keep up with payments you could risk the car being repossessed.

 


Buy a car with Personal Contract Purchase (PCP)

PCP is a slightly more complicated arrangement, but still one of the most popular ways to buy a car. It works by putting down an initial deposit for the car (typically 10%) and then taking a loan out over 3-5 years. The loan won’t be for the full value of the car as it takes into account the resale value of the vehicle at the end of the contract.

You have the option to make a ‘balloon’ payment at the end of the agreement to own the car outright. Often the value of the vehicle is slightly more than the balloon payment, and the dealer will allow you to use this equity as a deposit against a new car/contract. Alternatively you can return the car to the dealer and walk away.

Advantages

  • Suitable if you like to change car model on a regular basis.
  • Monthly repayments are more affordable compared with HP deals and personal loans.
  • It leaves you with flexible options at the end of the agreement.
  • Service and maintenance packages often thrown in.

Disadvantages

  • You don’t own the car unless you make the ballon payment at the end.
  • It tends to work out more expensive if you do this when compared with a personal loan or HP deal.
  • There are often limits with annual milage and exceeding these can incur extra fees.
  • Any damage or excessive wear will have to be put right at your cost in order for it to meet the future resale value.

 


 

Final thoughts & advice

In this guide we have highlighted some of the key differences between three main types of car finance.

Choosing which is best for you will depend on your personal needs and circumstances. That said, our top advise is to always understand the full cost of borrowing in the agreement you are getting into. Always calculate this by assessing the APR over the borrowing period as well as any additional costs.

You should always check all the terms of a car loan agreement carefully, as these can vary between different lenders and providers. You can start your search today by heading to our car loans comparison page.