Everything you need to know about car loans
If you’re looking to buy a new or used vehicle this weekend and you need to borrow money, there are 3 main types of finance available. One is a personal loan, hire purchase (HP) deal and lastly PCP (Personal Contract Purchase).
Taking out a personal car loan is a really popular option, with many buyers arranging finance through their bank or another lender before going to their car dealership. In times gone by this would put you in a strong cash position and gain you improved negotiation conditions. However, this is a myth these days, as dealerships like to sell there own finance products. There is an argument however, that bank loans deliver better interest rates and lower monthly payments than dealership car finance.
Look for low interest car loans
If you take a loan through a bank, it’s normally an unsecured personal loan that you’re required to pay back over an agreed term. You’ll be paying interest on the loan, so you need to look for the lowest interest rate possible. It’s a good idea to look online at some of the comparison websites to work out the best deal if you’re not happy with the rate your own bank offers. You pay back the loan at an agreed rate monthly for the duration of the deal.
The car isn’t security for the finance. This means that if you’re unable to pay it back, the lender can’t take your car off you. However, the lender can still take you to court if you don’t repay the loan. With car loans of this type, you own the car as soon as you’ve paid for it, without any debt to the dealership.
Disadvantages of unsecured car loans
Because the loan is taken out with no security, it’s harder to get one than it is to sign up for HP. Unless you have a good credit history and a decent salary, there’s a chance you might be turned down for a personal loan. You may also find the loans you’re eligible for don’t have a great interest rate, so you could end up paying more in the long term than you intended. Check which loan has the lowest APR, otherwise, over the repayment term, it could end up costing you a fortune. Bear in mind the lenders promoting a “representative APR” may not offer you this low rate and you may be charged a higher rate.
Hire purchase for car loans
Hire purchase is another option to buy a car. Offered by motor dealerships, it means essentially you “hire” the car over the contract period, purchasing it at the end. While you pay off the loan, the finance company owns the car. It isn’t yours until you’ve completed all the payments.
Dealers normally ask for a minimum 10% deposit of the car’s price. Some franchised dealers will offer you a contribution towards the deposit as part of a promotion if you sign up for one of their finance deals. You then pay off a fixed monthly repayment until you’ve cleared the debt. You can normally pay it off in between one and five years. The APR tends to be between 4% and 8%. Some dealers offer 0% finance, but usually only if you put down a larger deposit.
The main disadvantage of HP is that if you default on payments, the car could be repossessed by the finance company to pay off your debt. However, the advantage of HP is that it’s easier to obtain than a personal loan, because it’s secured on the car.
PCP – Personal Contract Purchase
This is the equivalent of a personal lease. It works by financing only a proportion of the cars overall cost and leaving a balloon payment for the end of the payment schedule. However, you do have an option after you have made all the payments to just hand the car back and your free to buy or PCP another new or used car. This is great if you never really want to own the car outright and like to change cars every 2 to 3 years.
There are however, things to be aware of within a PCP deal.
- Mileage Allowance – The final balloon figure is based on a set overall mileage, most are based on 10,000 miles per year, but can be increased. However, increasing the mileage also increases the monthly cost of your payments. If you go over your mileage allowance you will be given a pence per mile charge that you will need to pay before returning the car.
- Wear and tear, these contracts allow for general wear and tear but make sure you read what they class as general wear and tear so you don’t get any nasty surprises when you return the car. It must be in a roadworthy condition and be in a reasonable state of repair for the age of the car. Otherwise you may get some addition reconditioning costs added to the bill.
When looking for car loans, take the time to sit down and work out whether you’ll be better off applying for an unsecured loan from your bank or another lender, or taking the car on HP or PCP. If you’re looking for a loan, check out my personal loan comparison here. Compare the APR, the repayment term and the monthly payment rate.
Check out the deals and APR offered by different dealerships, should you choose to buy a car with an HP agreement. See if there are any special promotions on PCP which can save you money in the long term.
As with all things financial, your options may be limited if you have a poor credit rating. When applying for car loans, you may find you can’t get the APR you want because you’re considered a higher risk borrower. If you’re looking to get a HP deal, the bigger your deposit, the less you’ll pay off in the long term.