Car finance options

The right type of finance to choose, and how to adjust it to suit you: these are your car finance options

BuyaCar team
Oct 31, 2018

It’s all very well knowing that you want to finance your car, but the best approach to take isn’t always obvious.

As well as various types of finance available, you’ll normally be able to choose the level of deposit and length of agreement. In some cases, you’ll need to agree an annual mileage limit.

We look at the pros and cons of the major options below, so you’ll have a better idea of the choices that best suit you.

You can examine the different types of finance in more detail by looking at our other guides, or click below for current finance deals.

 

Types of car finance

Personal Contract Purchase (PCP)

The most popular type of car finance - and with good reason. PCP offers low monthly payments and plenty of flexibility. Once you’ve put down a deposit (which is often optional), you’ll then make fixed monthly payments.

These payments only cover the difference in price between the car at the beginning of the agreement and its estimated value at the end. In other words, it’s the value that the car is expected to lose over that period.

Because you’re not paying for the car in full, monthly payments are cheaper than with other types of finance.

This means that you can simply return the car to the finance company at the end. Alternatively, you can buy it by paying the remaining amount (the estimated future value, which is known as the balloon payment) or refinancing it.

It may be the case that the car turns out to be worth more than the estimated value at the end of the agreement. In this situation you’re able to trade it in and use the difference towards a deposit on another car. Alternatively, you can sell the car - with the agreement of the finance company - and pocket the difference.

PCP is available on most new and used cars that are under five years old. More details

 

Hire Purchase (HP) / Conditional Sale

Hire Purchase finance, or the virtually identical Conditional Sale agreement, are straightforward finance options. Your deposit (which may be optional) and monthly repayments add up to the total cost of the car, so once you have made the final payment, the vehicle is yours.

This also means that monthly payments are higher than with PCP.

Hire Purchase is generally available for any new or used car. More details

 

Bank loan

Borrowing from a bank to pay for a car in cash means that you’ll own the vehicle from day one, so you can modify it or sell it at any point.

As with Hire Purchase finance, your monthly payments will cover the full cost of your loan, so are likely to be higher than with PCP finance.

Interest rates can be competitive, but may not offer the cheapest option because they are not secured. Other types of finance are secured on the car itself, which makes it easy for lenders to repossess the car if payments aren’t made, reducing their risk and allowing them to offer low interest rates.

 

Finance options

Deposit
Most finance agreements offer flexibility on the level of deposit that you put down. In many cases, you won’t need to pay a deposit at all, although this does have repercussions.

The lower the deposit, the money you’ll borrow (and need to repay), which increases your monthly payments. You’ll also pay more interest overall because of the higher value of the loan.

In contrast, the higher the deposit, the less interest you’ll pay, and the lower your repayments.

 

Length of agreement
Car finance agreements can generally be repaid over a period of between two and four years. Shorter agreements result in higher monthly payments, but you’ll be charged less interest because the money will be repaid faster.

Spreading the cost over a longer period will normally result in reduced monthly repayments but a higher total of interest being paid.

 

Mileage restrictions
Because PCP repayments are based on the estimated value of the car at the end of the agreement, lenders need to know how many miles you’ll cover, as a car is generally worth less the more miles it has done.

It makes sense to calculate your annual mileage limit as accurately as possible: estimating a high mileage will increase your monthly payments, but aiming too low puts you at risk of penalty fees for exceeding the limit.

 

Options available at the end of car finance agreements

PCP
If you want to keep your car at the end of the PCP agreement, then you’ll need to make the balloon payment. This figure is calculated when you take out finance, and is an estimate of the car’s value at the end.

The balloon payment can be paid in one lump sum, and can usually be refinanced too, spreading the cost over another series of monthly payments. Because you’ll be taking ownership of the car, the car’s mileage and condition won’t matter.

Alternatively, you can choose to return the car to the lender and have nothing more to pay. In this case, the finance company will inspect the car to ensure that there’s no excessive damage (as set out in trade guidelines), and that the mileage is below the limit agreed. If the car isn’t up to scratch, penalty fees will apply.

Buyers will have a third option if their car is worth more than the balloon payment. In this case, the vehicle can be traded it at any good car retailer, who will settle the finance and put the excess amount towards another car. Alternatively, you can sell the car with the agreement of the lender, settle the finance and keep the difference.

 

HP Once you’ve made the final payment on a Hire Purchase agreement, you’ll own the car. This means you’re free to modify or sell it whenever you like.

 

Bank loan
Because bank loans aren’t linked to the car that you buy, then nothing changes once it has been paid off - apart from the fact that you’ll have more money each month.

You’ll use the loan funds to buy the car yourself, so it’s owned by your from day one.

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