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Car finance explained

Everything you need to know about car finance and how you can utilise it.

Finance schemes are becoming increasingly popular in all walks of life and are not just limited to the bigger purchases you will make such as a home or car.

Indeed, buying a home or a new car will likely be two of the biggest purchases you ever make in your lifetime and the vast majority of people will rely on a finance scheme to help them manage the costs.

But even clothing and beauty brands are offering the option of payments to be spread out over several months rather than expecting a one-off payment at purchase.

Do you want to save money on your car finance deal? Sign up to Car Credible today to see how we can help you.

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The pros of taking out a finance deal are that you can spread your payments out over several months at a fixed monthly cost and making regular, on-time repayments can improve your credit score to help you borrow in the future.

On the other hand, if you miss a payment it could massively impact your credit score and you could be inclined to buy more than you can actually afford if you know you don't have to pay for it immediately, potentially spiralling you into future debt.

What is car finance?

If you wish to purchase a new - or used - car, then you will have the option of taking out a finance deal. This can be done both at a car dealership or online.

Car finance is an agreement between you and a credit lender, who, after conducting a series of credit and financial checks on you, will decide if you are eligible to borrow a lump sum of money to pay for the car.

If you are approved, your obligation once you enter an agreement is to make fixed monthly payments back to the lender over an agreed period of time, typically between 12-60 months depending on how much you can afford to repay per month.

On top of the cost of the car, you will also be required to pay interest, and the APR will vary from person to person depending on their credit history and ability to make the repayments.

What car finance options are available for me?

If you wish to buy a car, you should know the various car finance options available to you. Of course, if you have the money to buy the car outright then you are able to do so, but most rely on finance to cover the cost over a number of years.

There are four main types of car finance available:

  • Personal Contract Purchase (PCP)
  • Hire Purchase (HP)
  • Personal loan
  • Leasing

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PCP

With a PCP, you typically put down a deposit - around 10% is advised but it can be more or less - and then make fixed monthly repayments.

The car is owned by the lender while the money you are paying back only covers the depreciation of the car, which begins the moment you drive off of the dealers' forecourt.

This type of car finance is ideal for someone that likes to change their car every few years and gives you the flexibility to make your own decision at the end of the agreement, provided the car is in good condition and you've not exceeded any mileage limits agreed at the start of the contract.

At the end of your PCP, you will have three options:

  1. Keep the car by making the lump sum balloon payment
  2. Return the car
  3. Change into a new car on a new finance agreement

HP

An HP is similar to a PCP in the way that you have to put down an initial deposit and make fixed monthly repayments. But where it differs is you are essentially only hiring this car until you make your final payment.

Once you have made the final payment, the car is yours outright and you no longer have to pay anything more towards it per month. 

This type of finance is perfect for those who may want to pay a lower amount per month, over a longer-term, and are happy to own and keep the car at the end of it.

Personal loan

This is another increasingly popular way to finance a car. Rather than making repayments to a finance company that owns the car until you've made your payments, you take out a loan from a bank and own the car outright from the start.

You then make your monthly repayments to your lender with interest across a period of time that suits you, as you would on a PCP or HP, but you already own the car. 

The interest rate you get offered will be dependent on your credit score and history, the length of time you want to make the repayments, and the lender you opt to go with.

This type of finance is great for someone that is happy to keep the same car for a longer period of time.

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Leasing

The leasing finance option is when you never own the car outright, you are just hiring it across a period of time. Unlike a PCP or HP, you will never have the option to own the car outright.

But, much like a PCP, you do get the option to change your car every few years if you wish. 

This type of finance is excellent for those that want to change their cars regularly and may not be able to afford particularly cars on a traditional finance deal. 

Like an HP, your repayments only cover the deprecation of the car.

What finance is best for me?

It's worth taking a look at all of the different options and making a pro and con list depending on your needs and budget.

While a PCP may be perfect for one person, it might not work for you, but there are plenty of different options to help you get your dream car.

At Car Credible, we make car finance simple. We give you the ability to renew your finance, refinance your current deal, or take out new finance completely.

Alongside our partner, CarFinance 247, we can help get you into the best possible deal.

Sign up for free today to see the options available to you.

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