Finance option

Finance option

18 September 2013
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Finance options

People have been using car financing to purchase both new and used vehicles for many years. It is probably one of the easiest ways to get you hands on a new car without having to spend half your life saving up for it? Car finance makes it possible for people that can't save the deposit money but need a car as soon as possible, to get the car they want in the shortest possible time.

There are many people who can afford to purchase a car outright but still opt for car finance simply because of the many advantages that car finance has. 
There are various types and kinds of car finance available. Each has its own ups and downs; however it’s important that you search for a car finance option that offers you the lowest overall interest rate (annual percentage rate) possible. For people that have the money to purchase a car outright getting car finance means that they can save the money in an interest bearing account or put in an investment which will yield more money.

There are many dealerships which also offer car financing however the problem with getting car finance from a dealership can be the high interest rates. Dealerships tend to offer the highest interest rate however they may be a good option for people with poor or bad credit since they have reasonable lending policies. In many cases it's not actually the dealership which is extending the car finance, but a finance company which is working on the backend and gives the dealership a commission from the financing business they provide to the company.

This in turn benefits both the dealership as well as the person purchasing the car. This is why typically many dealerships will be unwilling to do business with people who are looking to pay for the vehicle in full. This way they don't make as much of a profit and they just make the money which is built into selling the vehicle. 

Deciding to opt for car finance is your personal decision but there are more perks associated with good car finance than drawbacks.

There a few ways to find a competitive interest. You might consider borrowing against an asset like a property. By putting down a large deposit, the lender feels safer. Lengthening the agreement should give you lower payments, but don’t forget you will be paying more overall for the privilege.


Going For Hire Purchase

Hire Purchase (HP) is the traditional way to finance a car purchase. You pay off the entire price of the vehicle through a series of monthly payments. At the end of the contract period the vehicle becomes your property.

The monthly payment is determined by the amount of deposit paid, the period of the contract and the sale price of the vehicle.

HP is very similar to borrowing a sum of money from a bank and paying it back over a fixed period of time, with interest. Hire purchase is a type of secured loan which are often preferred over alternative (unsecured) loans because they allow a greater borrowing limit. The term "secured loan" means exactly that, a loan that the lender can secure against an asset (in this case, a car).

As mentioned above consider financing the car over a longer contract period - perhaps a 60 month contract will make your car of choice more affordable.

The amount of deposit you are able to put down will dramatically effect your monthly payments. Higher deposit means lower payments.

Personal Contract Purchase (PCP)

PCP is somewhat of a mixture of HP and leasing. 

With PCP you pay a reduced monthly payment by rolling a large portion of the financing into an inflated payment that is payable at the end of the contract. Ownership of the car does not pass to the driver until these balloon payments are made. 

There are other alternatives at the end of the PCP contract. Drivers can return their car at the end of the deal or they can refinance the deal and hold onto the car in return for a renegotiated monthly repayment. 

The real purpose of PCP is to encourage regular trade-ups to a newer model every 2-3 years, which will allow you to skip the inflated payments, and therefore never actually own your cars but drive the latest model. 

The difficulty is people only see the reduced monthly repayments and may forget the balloon payment, or don't understand the contract they have entered into. Understand all the repayments, both regular and inflated, and read the small print carefully.

Leasing and Contract Hire

Leasing is more popular with the business customer. However, it appears to be growing in use for the personal customer also.
It makes most sense for the business customer, as the payments are 100% deductible as a revenue expense in the Profit and Loss account. Therefore, it is particularly "tax-friendly" for companies and the self-employed. Legal ownership of the vehicle remains with the finance company or leaser. Most leasers require a 10% deposit or one to three months down-payment which will then be deducted at the end of the contract. A lease basically allows you to rent the vehicle for a fixed monthly cost. The monthly cost is determined by the value of the vehicle, the projected depreciation of the vehicle and interest. 
At the end of the contract, there are generally three options. 
1. With a standard lease, the vehicle is returned to the leasing company, who will sell it to a third party. You will be free to pick a new car and negotiate a new lease. 
2. You can extend the terms of the original lease by paying a nominal annual rental fee.
3. If you decide you want to keep the vehicle, you need to negotiate a purchase price with the lesser based on depreciation and resale value. 

Leasing companies can and do impose costs for excessive wear and tear of the vehicle, such as damage to the body. These will be extra costs to if outlined in the leasing contract. All leases have mileage limits and anything in excess of these limits will incur a per mile cost. The general advice is to be absolutely sure you want to lease prior to entering into an agreement. 

Contract hire is a hybrid of car leasing. A monthly payment is calculated, and worked out on the differing value of the vehicle at the start of the contract and an estimation of what the value will be at the end of the contract (residual value) after the depreciation has been factored in. Very often there a limit on the amount of mileage you can have with a contract hire agreement and there are usually penalties attached if you go above the amount as the residual value is calculated on this limit. The term is only applicable to the business customer since the VAT can be claimed on 50% of the entire payments made and 100% of the repair charges.

Using a Personal Loan

Essentially borrowing a lump sum of money from a lender to buy a private item IE a car, kitchen, holiday etc. The money can be borrowed from mainly banks, building societies or private lending companies, which all have to be regulated by the Financial Services Authority (FSA). The amount you can borrow will depend on a number of factors such as your income, credit history and rating, what you want to buy with the money and whether you can put down any security (your house). Loans can be either secured or unsecured, the former meaning that the loan might be secured on your house (if you don’t keep up the payments you might lose it!), or some other type of fixed investment. While, an unsecured means that a form of security is not required.

With the unsecured loan, the interest rates are higher and there may be compulsory protection insurance such as PPI (Personal Protection Insurance) to cover illness and or redundancy. This is because this type of loan carries more risk.

There lending period for a personal loan is usually between 1 and 5 years. The shorter the period, the higher the payments, the longer the period, the lower the payments are.

As will all methods of financing read the small print, to find out how the interest works either fixed or variable, extra charges and what they are for, and penalties in the event of a non payment.

Interest-Free Credit

From time to time you do see interest free deals available, usually on purchasing a new vehicle. In essence they are a buy now pay later deal, but be aware that if you default on any payments, you will be heavily penalised with interest penalties which can be calculated on the amount borrowed. A car is a major purchase, it is not good advice to purchase any time whether car or not because you can get it on an interest free agreement. If you choose this option make sure to note all the payments made and the dates they were paid on.

A Few Points to Ponder

How much you are paying for the car

Your salary

The period of the loan

Your credit history will be checked

Get a quote finance your vehicle