What do you when considering buying a car on finance in the UK? Car financing can be a complex and challenging venture, especially if you don’t have enough money. From outrightly buying a car to using finance, you are faced with several options. First, you need to think about the running costs because it could just be the most expensive thing to buy after your house. This is the reason you need to choose the best option in which you’ll buy your car.
The easiest and cheapest way to buy a car in the UK is to fund all or to make part payment in cash. If you succeed in making the entire payment in cash, then the car automatically belongs to you.
However, if you wish to buy a car using finance, then there will be a credit agreement between you and the lender. With this, you can pay for the car over a while, alongside an interest that will be paid on the loan balance.
For this topic, here are four finance options available for buying a car on finance in the UK.
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Four Financing Methods for Buying A Car on Finance In The UK
1). Hire Purchase (HP)
Hire Purchase is an easy option for buying a car on finance. In this case, you will need to obtain a loan against the car. First, you will be required to make a 10 percent deposit payment, then make fixed payments which will be on monthly basis, depending on the agreed time.
With this arrangement, it means that you don’t own the car until the last payment is made. Therefore, if you default in making the routine payments, you could lose the car.
Normally, hire purchase agreements are arranged by the car dealer. This means it comes easily and at the same time, can be competitive for new cars and less for used ones.
Kindly note that rates are favorable for new cars, so you need to be sure of what you’ll be paying if you are buying a used car.
When you have made part payment for the car, it is possible to return the car if you choose to. But bear in mind that the car must be in good condition else, you will be charged for the cost of repairs.
2). Personal Contract Purchase (PCP)
This type of car finance option is similar to a hire purchase agreement, but it attracts lower monthly payments. But you need to bear in mind that the total money you will pay back is often higher.
Rather than obtaining a loan that will cover the entire cost of the car, what you’ll get is a loan for the difference between its price as brand new and the forecasted value of the car at the end of the hire agreement. This rightly depends on the predicted annual mileage throughout the agreement.
Now, at the end of the hire purchase term, you have the option to:
- Return the car to the dealer or lender and pay for any charge you incurred while using the car. Charges can be awarded in case of any wear and tear or going beyond your required mileage.
- Secondly, you can pay the resale value and keep it. This arrangement is referred to as a balloon payment. In this case, the lender evaluates the care based on its current value and this can range from a few hundred to or thousand pounds. Remember that it will be a larger payment than your normal monthly payment. In case you have not saved up to this amount, then you should take another loan to pay it off.
3). Leasing – Personal Contract Hire (PCH)
When you lease a car, it essentially means that you are renting it so, you are not the owner and you don’t have any option of buying it at the end of the contract period. With this contract arrangement, you are required to pay the dealer a fixed amount on monthly basis for servicing and maintenance.
Leasing normally costs more when you pay every month, compared with a Personal Contract Purchase. However, it offers you the flexibility of changing the car you are driving within two to three years. This is an amazing way to drive cars you can’t easily afford to buy. The payments you make on Leasing arrangements are the same as a hire fee which covers servicing and maintenance so the car doesn’t depreciate.
4). Personal Loan
This is an interesting option to buy a car on finance. It involves borrowing money to outrightly purchase the car, often from a bank or an association. In this case, when you pay for the car, it automatically becomes yours. When it is time, you then repay the loan to the lender, with an additional interest made payable within a convenient period. The amount of interest you can pay depends on the lender you are transacting with, as well as your financial capacity and your credit score. This arrangement is only suitable if you plan to use the car for a long time and don’t want to change cars often.
Buying A Car on Finance: Factors to Consider
While making comparisons on car finance arrangements, there are several factors to consider before making a final choice.
- Make sure you can meet up with the monthly payments until you complete the loan term. Also strategize how you should pay for the maintenance costs like road tax, insurance, and other sundry expenses.
- You need to understand the terms and agreements which bind the transaction like balloon payments, mile limit, as well as maintenance costs. If you find it difficult to understand, then it might not be the right financial solution for you.
- Try to enquire from the firm offering you the finance about the penalties for failing to pay one month, and what options you would have if you are not capable to pay.
- Analyze the overall cost of borrowing alongside all charges throughout the loan term.
- Avoid making early repayments or other fines like charges for exceeding the agreed mileage in personal leasing and personal contract purchase plans.
- Compare interest rates by checking the Annual Percentage Rate that covers all the charges you are expected to pay. Do not forget that a bigger deposit will certainly result in a small interest rate. You should also find out if the interest rate is fixed or flexible so that you’ll know when payments are about to increase.
- Do a thoughtful analysis before concluding on buying Payment Protection Insurance (PPI) it other types of insurance covers, as they may be expensive and have limited coverage.
UK Car Finance FAQs
1). How does car finance work?
First, you need to ask the lender if you are eligible. If you are, then calculate the payment you can afford using their finance calculator. You will get a quote in minutes.
2). How do I get started?
You can start by using your eligibility checker, then decide on what you can pay by using a car finance calculator. If you wish to continue, you can then fill out an application form within a few minutes. And if you have chosen a car to buy, just enter the information in your form.
3). Can I use any car dealership?
Yes. Provided it is a reliable UK dealer. Several approved car dealers in the UK have passed the required financial checks and hold trusted trading licenses.
4). What if I’m confused about the car I want to buy?
That is not a problem. It is most common for car buyers in the UK to obtain a loan before committing to a car. You need to first check the reviews of your choice dealer, as this would help you to make the right choice in the type of car you want. You can then present a suitable loan amount and a convenient time frame, as long as it does not exceed five years.
5). If I have a bad credit history, can I still get car finance?
You can still qualify for Car Finance even if you have a bad credit history. A typical credit organization will have to review your personal circumstances like income and possible loan amount, employment status, age, and your credit history. Thereafter, you’ll find out the exact payments and interest rates they can offer you. Don’t forget to use an online eligibility check.
6). Do I need to sort out car finance before consulting a dealer?
It is advisable to sort out finance first so that you can visit the car stand with full knowledge of what you can afford in terms of the price and monthly repayments. It is very important that you get a pre-approval and properly understand your credit score, as this will determine your eligibility rate.
7). How do I calculate my deposit?
Your deposit is simply the amount of money you first present to the dealer. This comprises savings and the value of a current vehicle as possible collateral. This provision will be subtracted from the total sum of the car you want to buy.
8). Can I pay off the loan early?
Of course. You can pay off your loan on time to avoid facing any penalties. You will be given a rebate of interest if you pay off the loan on time. Also, you have the option to make overpayments to your chosen lender, to reduce your loan term.
Given the various options available, buying a car on finance in the UK is an easy way to own a car. I believe this post has relevant information that can guide you in making an informed choice on how to buy a car on finance in the UK.
To your success!