Collaborative Post¦ So, you’re in the market for a new car and looking to finance it but how do you decide which car finance deal is right for you? If you’ve never taken out finance before or you have only ever used one type of traditional finance, then you may want to explore other avenues. It can also depend whether you are looking for a new car or used car too! Ideally, you should sort your finance first and get the best deal possible and then find the new or used car that’s right for you.

Let’s take a look at the different types of car finance and the pros and cons of each!

Hire Purchase

Hire Purchase is a really straightforward type of car finance. You are essentially hiring the car from the lender until you have made the final payment. You can obtain a Hire purchase agreement at a dealership or an online car finance broker. Your payments are split into monthly payments with added interest and you usually have to put down a 10% deposit at the start of the hire purchase car finance agreement. The loan is secured against the car which means that if you fail to make your repayments then the lender has the right to take the car away from you. Once you have made all your payments at the end of your term then the car will legally become yours and the finance agreement will end.

Pros and cons of Hire purchase

Pros

• No mileage restrictions
• No lump sum at the end of the agreement
• Fixed monthly payments throughout
• Flexible repayment terms
• Low deposit or no deposit available

Cons

• Monthly payments are usually higher than other finance options
• The loan is secured against the car so if you fail to make your repayments you could lose the car
• Repeatedly missing repayments could harm your credit score

Personal Contract Purchase

Personal Contract Purchase or PCP is similar to a hire purchase agreement as you will put down a deposit and then make fixed monthly payments to an agreed term with added interest. You can obtain a PCP deal at a broker or at a dealership. You can also benefit from no deposit car finance offer with a PCP deal too. Unlike Hire Purchase though, you will have 3 options at the end of your car finance agreement. You can either hand the car back, pay the final ‘balloon payment’ and own the car or use the resale value of the car to get another car on a PCP deal.

Pros

• Monthly payments are usually lower
• Flexibility to either keep the car or hand it back at the end of the agreement
• Fixed costs that are secured against the vehicle
• You could refinance the balloon payment
• Maintenance and servicing costs can be included on some deals

Cons

• You may have to pay mileage and damage charges if you wish to return the car in a different conditioned that was agreed in your contract.
• To keep the car, you will have to pay the balloon payment which can be quite expensive
• Interest on the balloon payment is included in your monthly payments even if you don’t want to keep the vehicle at the end of the agreement.

Personal Loan

A personal loan is different to both hire purchase and Personal Contract Purchase. You can usually obtain a personal loan from banks, building societies, credit unions and private lenders. It can be harder to obtain a personal loan if you have a low credit score. If you are applying for bad credit car finance then it may not be the best option for you. You get accepted for a certain amount which you will then pay back in monthly instalments plus interest. You can use a personal loan for pretty much anything so the money is deposited straight into your bank account and then you can get a car within your budget! You will also own the car from the start too, meaning that you can sell it at any point. However, you will still have to pay off the loan even if you sell the car before the end of the agreement.

Pros

• You can get the money within days once approved
• The loan is not secured against the car so the car cannot be taken off you
• You can sell the car at any point but still keep up the repayments
• Fixed payments for the full term
• You can buy your car from a private seller or dealership
• Use a personal loan to rebuild your credit score when you make your payments on time.

Cons

• It can be harder to get approved if you have bad credit
• Buying a car privately doesn’t benefit from the thorough dealership checks which you benefit from on a hire purchase or PCP deal

Personal Contract Hire

Personal Contract Hire

Personal Contract Hire or PCH is a form of car finance leasing and can be obtained at a car dealership. You can pay an initial deposit followed by monthly payments to the dealer for the use of their car. At the end of the agreed term, you simply hand back the car and the finance has ended. The car was never yours to own as you only ever hire it from the dealer. You usually pay higher monthly payments, but you have more flexibility when you want to switch the car. However, overall, it could be more cost effective as payments include servicing and maintenance costs.

Pros

• Fixed monthly costs
• Servicing and maintenance costs included
• Low deposit
• You can change the car every few years
• You don’t have to worry about the car depreciation while using it

Cons

• You won’t ever own the car and don’t have an option to buy it
• The finance company can terminate the agreement if you fail to make your agreed repayments
• You can also be charged for any miles you do above your agreed mileage limit
• You can be charged for any damage to the car

Disclosure: This is a collaborative post.