WHEN it comes to car finance there are a small number of primary options to choose between. The principles of each option are very similar but they all offer their own nuances and benefits.
In this blog we are going to discuss the different types of car finance, so you can decide which one is best for your circumstances.
Hire Purchase (HP)
A Hire Purchase (HP) loan is secured against the car, so you won’t officially own the vehicle until the end of the deal and the final payment has been made. This means you are hiring the car from the lender until it’s been paid for in full. You can pay off the outstanding balance at any point in the deal by requesting a settlement figure.
You can choose whether or not to pay an up-front deposit, which may be wise to lower your monthly payments afterwards. These will be made over an agreed period of time.
Personal Contract Purchase (PCP)
A Personal Contract Purchase (PCP) agreement is very similar to a Hire Purchase agreement. You have the option to pay a deposit and then you will pay a fixed monthly amount over a set period of time, usually between 2 and 4 years. The difference with this type of car finance is evident when it comes to the end of the deal.
At the end of your deal, you will have the option to:
- hand the car back
- use the equity as a deposit for your next car
- obtain ownership of the car by paying a balloon payment knows as the Guaranteed Minimum Future Value (GMFV)
A clause in your agreement will state the maximum annual mileage you are allowed to drive. There may be charges set by the lender if you exceed this.
Personal Contract Hire (PCH)
Personal Contract Hire (PCH) is very similar to PCP, but you will never own the car. So, if you are not planning to buy your car on the completion of your finance deal, then PCH might be a cheaper option compared to PCP.
Bad Credit Car Finance
All of the car finance options above will usually involve some form of deposit, and will all involve a hard credit check. This will show up on your credit file and may do it some harm if you have lots of other hard credit checks on your file too. With bad credit car finance, you will not have to make a deposit and will just need to stick to your monthly payments for the duration of the deal. This type of finance is designed to help people with lower credit scores. The application process first begins with a ‘soft’ credit check. This will determine whether or not your lender feels they can find a finance deal for you, without affecting your credit score in any way.
Only once the lender is confident they can find credit for you, and you are happy with the proposed deal, will the application then progress to a ‘hard’ credit check. You will need to prove that you can afford to keep up with the monthly payments.
Personal Loan
With a personal loan you to borrow an amount of money over a fixed amount of time. This is an unsecured loan that is personally accountable by you, so it is not directly linked or associated with your car. You will own the car from the moment the dealer receives the money for it. The loan company will pay the money to you and then you pay the money to the dealer.
Guarantor Loan
Guarantor car finance is where a close friend or family member becomes your guarantor, meaning they guarantee that any repayments will still be made by them if you fail to keep up with repayments yourself. Typically, this type of loan is paid to your guarantor and then they release it to you, but it is your responsibility to make the repayments to the lender directly.
