How to choose the right car finance agreement for you

This is a collaborative post

Getting a car is one of the biggest purchases you will make. Buying a car with cash can be the most beneficial but getting car finance can enable you to get a better car than you could with cash. Car finance is a great way to spread the cost of owning a car into affordable monthly payments. If you’ve never taken out finance before you may be unaware of the different types of car finance agreements available and how one may be more suited to your circumstances than others. Whichever route you choose to go down, let’s investigate the most popular types of car finance in the UK.  

Hire Purchase 

A hire purchase car finance deal is a straightforward type of finance. Monthly payments are usually a little higher than other finance options as you spread the full cost of your chosen vehicle into affordable monthly payments. You pay an initial finance deposit and then make monthly payments till the end of your agreed term with added interest. Hire purchase deals are usually paid over 12-60 months and once you’ve paid off your loan, you will become the owner of the car. Until this point, if you fail to meet your repayments, the finance company own the car and have the right to take the car off you. Make sure you only borrow what you can afford to pay back each month. Within a hire purchase car finance deal there are also no mileage or damage charges associated with running the car.  

Personal Contract Purchase 

A Personal Contract Purchase or PCP deal usually has lower monthly repayments than a hire purchase deal. This is because the cost of the car isn’t fully covered in your deal but the car depreciation instead. At the start of your agreement, the Guaranteed Future Value of your car is calculated which is the amount your car will be worth at the end of your agreement. Just like Hire purchase you put down an initial deposit followed by monthly payments till the end of the term, however you have 3 options at the end of a PCP deal. You can either pay the balloon payment and own the car, hand the car back to the dealer and walk away or use the value of the car to start a new PCP deal on a different car. Many people choose to finance a car using PCP because it’s easy to get a new or used car every few years. However, because the car needs to return in good condition, you will need to set a mileage allowance at the beginning of your contract and there may be charges if you exceed this limit. 

Personal loans 

Personal loans are usually provided by a bank or building society and allows you to borrow a certain amount of money and make fixed monthly payments with interest. A personal loan can be used to buy anything you want, so you can use however much you want to buy a car and own the car outright and sell it when you want. A personal loan can be harder to obtain if you are looking for car finance with bad credit as lenders tend to favour people with good credit scores.  

Guarantor car loans 

If you are struggling to get approved for finance, you could consider a car loan with a guarantor. Car finance lenders like guarantors as it gives them more confidence that the loan will be paid. Guarantor car finance is when someone such as a friend or family member agrees to pay your finance if you fail to do so. It is similar to a personal loan, but the amount will be paid to your guarantor and then released to you, and you will then be responsible for meeting the repayment schedule. If not, your guarantor will then be legally obliged to pay it for you. If neither of you pay it can seriously harm both of your credit scores and can lead to County Court Judgements and defaults.