The car finance industry is more popular than ever, and an increasing number of people are opting to spread the cost of their next car purchase. If you’ve been burnt in the past by choosing the wrong agreement or haven’t had a car on finance before, you may be wondering if its right for you. There are many benefits to getting a car loan, from spreading the cost to getting a better than you would with cash, car finance can be a no brainer for many. The article below has been designed to explore how car finance could benefit you and your finances. Let’s find out more.
How does car finance work?
Car finance is when you borrow an amount from a lender to fund your car purchase. Depending on the agreement you choose, this could be in the form of a secured or unsecured loan. Unsecured loans such as personal loans allow you to borrow an amount to source your own car and purchase it like a cash buyer. Hire purchase and PCP deals are forms of secured loans which means the lender owns the car you choose until you make the final payment at the end of the deal. No matter which agreement you choose, you will borrow a set amount from a lender and pay it back in monthly instalments with interest till the end of the agreed term.
Types of car finance
It’s a common misconception that car finance is a one size fits all agreement. In the UK, car finance agreements that tend to be the most popular are a personal loan option, hire purchase and personal contract purchase (PCP).
- Personal Loan. A personal loan can be used to purchase anything you want. When you apply for a loan, if accepted, the money will be deposited into your bank account, and you can shop for a car at a dealer or private seller just like a cash buyer. You will then pay back the loan over 1-7 years with a fixed interest rate.
- Hire purchase. Hire purchase cars allow you to borrow money from a lender to cover the cost of your chosen car. You can choose a low or no deposit car finance deal and usually, you pay back HP loans over 3-5 years with fixed monthly payments and interest. HP can be good loan option for those with lower credit scores as the loan is secured against the vehicle.
- PCP. PCP deals are similar to HP, but you don’t cover the cost of the car. Instead, monthly payments tend to be lower because you only pay back the value of the depreciation. You can then choose to hand the car back to the dealer, use the value towards another car on PCP or pay the large balloon payment and keep the car.
5 benefits of getting a car on finance
- Spread the cost
The biggest benefit of getting a car on finance is that you can spread the cost of getting the car you want. Many people don’t have the money to hand to pay for a large car purchase. If your current car breaks down or if you have a job that requires you to have a car, you may not have time to save up the cash to get a car. This is when car finance can allow you instant access to a car and pay for it in affordable monthly payments.
- Improve your credit score
Many people think that car finance has a negative impact on your credit score. However, if used correctly, car finance can actually help to improve your credit score. By meeting all your car payments on time and any other financial commitments you have, you can increase your credit score. Showing evidence of managing your money responsibly and reducing any debt you have can put you in a better credit situation when it comes to getting any other loan or finance.
- Get a better car
If you were looking to buy a car with cash, you may have a limited budget and smaller budget usually mean older, second-hand cars. Car finance on the other hand can help you to purchase a new or used car and pay for it in monthly instalments. You can usually get a newer, more reliable car through car finance than you would with cash.
- More ownership options
When you get a car on finance, you have more flexibility when it comes to owning the car or not. At the end of a hire purchase deal, you can choose to pay the small option to purchase fee and keep the car or hand the car back to the dealer. PCP deals also allow you to hand the car back or pay the large balloon payment and keep the car. If you’re struggling to pay the balloon payment, you could also consider refinancing it to spread the cost.
- Fixed monthly payments
Car finance can help you budget better due to the fixed monthly payments. Within car finance, your payments will stay the same throughout the duration of the loan and your interest rate will be fixed too. This can help you to keep on top of your monthly expenditure and make sure you’re not overspending.