You’ve found the car you want to purchase, great, but how are you going to pay for it? With many different options for buyers to consider, knowing what to look for isn’t always simple. Of course, if you have the cash in savings and can afford to buy a vehicle outright, you can move on to enjoying your new car. For most, choosing the right type of car loan is a vital first step and will depend on what’s best for you and your circumstances, especially if you are a car finance bad credit applicant. To help, here are some of the typical car loan options available so you can choose the best for your needs.
Personal Contract Purchase (PCP)
As the name suggests, PCP is a contract between you and the lender that requires monthly repayments with certain conditions attached. You will normally have to pay an initial deposit amount, followed by monthly repayments plus interest over a defined loan term, for example, 36 or 48 months. Rather than the full value of the vehicle being spread over this period, you will pay lower monthly repayments during the term that includes interest. Once the term is fulfilled, you will then have the option to purchase the car outright for the remaining value, by way of a balloon payment, or return the vehicle to the dealer or lender. You can then use the difference between the value of the car and the balloon payment to use as a deposit on another PCP agreement for a different vehicle if you want to. PCP is one of the most popular ways to finance a new car, but essentially you do not own the car during the term. This means you will have mileage restrictions and this can be costly if you go over the set amount when returning the car, as well as if the vehicle has picked up any damage over the term.
Hire Purchase (HP)
A hire purchase agreement is similar to PCP, however, the full value of the vehicle you choose is spread over the loan term including interest. You will normally have to pay a deposit amount, with the rest of the vehicle value and interest charge spread over monthly repayments. As it is the full value of the vehicle amount, the monthly repayments will be higher than those with PCP although with Hire Purchase there is more often no balloon payment, however you could be liable for an option to purchase fee at the end of the contract. This is also because when you reach the end of the agreement, you will own the car. You can then decide to either keep the car or sell it, depending on your future circumstances. To keep monthly repayments lower, paying a larger deposit at the start can reduce the amount borrowed. Whilst often more expensive each month than a PCP agreement, you will own the car at the end and have no mileage restrictions during the term to contend with.
Taking out a personal loan from a bank lender is one of the traditional ways to finance a car. Rather than taking up PCP or HP from a dealer or lender, you can choose to seek finance through your bank and pay for the vehicle outright. Once you know the value of the car you want to purchase, you can then determine how much you want to borrow and choose the repayment term you can afford. This can be a simpler way to finance a car and will mean you own the vehicle from day one. It also means you can choose to sell the vehicle at any time, as long as you maintain the monthly repayments.
Whichever option you choose to finance a car with, you should always compare lenders to ensure you are happy with the interest charge and terms of the agreement first. If you have an existing car to trade in, this will also help to reduce the value of the car loan you require. If you are someone with a poor credit history, you will need to consider that some of the above options may not be available. If so, finding specialist car loan lenders who can help those with bad credit maybe your best option and provide the car finance you need for your unique circumstances.