Types of available car finance

Car finance is a process that allows you to spread the cost of a new or used car. We breakdown the common ways to finance your next car.

What is “car finance”?

Car finance is a process that allows you to spread the cost of a new or used car. This allows you to pay monthly rather than the full amount upfront over an agreed period. The amount of deposit you are willing to put down and monthly payment will be determined by the cost of the car, the interest rate (APR) and the length of your agreement. There are many different finance products available to suit your individual preferences and circumstances with the most common being hire purchase (HP), Lease, Personal contract purchase (PCP) and conditional sale

There are many ways to pay for a car on finance. In this article we will break down some of the common finance types with both pros and cons

Hire purchase (HP)

Hire purchase is where the lender owns the car until the load is fully repaid, including the final ‘option to purchase’ fee. HP is one of the most commonly used forms of car finance. If you decide to take out this agreement you can choose to pay a deposit upfront followed by regular monthly payments over an agreed period of time. The monthly payment amount is dependent on the deposit size. As the loan is secured against the car if you fail to meet your monthly repayments the vehicle can be reclaimed by the lender. If you have missed regular payments this will also cause a negative impact to your credit score. 

The benefit of an HP agreement means you have no mileage restrictions as per other car finance products. Your monthly payments are fixed over the entire period which allows you to budget easily. Also being a HP agreement you don’t need to find a large lump sum payment as you can return the vehicle to the lender

Conditional sale

Conditional sale (CS) agreement is the same as HP except you will automatically own the car once the finance has been repaid in full. This may or may not include a balloon payment at the end of your agreement

Lease, contract hire

Car leasing is a long term rental. This agreement requires you to pay around three months lease upfront followed with fixed monthly fee for an agreed time period and number of miles. In order to secure a lease agreement you will first need to pass a credit check. Lease agreements can range from 12 months to 5 years. A lease contract means you will never own the vehicle which you will return at the end of the term. If you are planning to take out a lease agreement keep in mind you are restricted from modifying your case in any way. Monthly payments tend to be higher than equivalent vehicles leased through PCP however over the entire contract you pay less on a PCH depending on the length of the contract. 

Personal contract purchase (PCP)

Similar to a HP agreement with a PCP agreement you have an option to put down a deposit followed by fixed monthly repayments over a set period of time. The typical duration of a PCP agreement is between 24-48 months. If you decide to take a PCP agreement at the end of your term you have the option to hand the car back, use the equity as a deposit for your next vehicle or take ownership of the car by paying the balloon payment also known as the guaranteed minimum future value (GMFV). However this agreement means you are in contract of an agreed maximum annual mileage which means if you exceed the agreed annual mileage and if the car is subject to damage that is not classed as general wear and tear there many be additional charges by the lender. 

Personal loan

A personal loan allows you to borrow an amount over a fixed amount of time. This means you will own the car from the time the dealer receives the money for it. Unlike HP and PCP the loan is not secured against the vehicle itself therefore you can sell the vehicle at any time without needing permission from your finance company. If you have a poor credit history your chances are low to be accepted for a personal loan. 

Credit sale

Credit sale agreement means you become the owner of the vehicle at the start of your agreement. If you have this type of finance on your Motorscan report you should obtain clarification from the seller of the vehicle. 

Unit stocking

Unit stocking is a form of credit used by car dealers to help fund the vehicles on their forecourt. You may come across ‘Unit stocking’ finance on your Motorscan report if you are buying the car from the dealer. This can mean the dealer has not yet paid of the unit stock financing. It is important to contact the dealer, check their liability and get written confirmation that they will clear the outstanding finance on the car you are buying.

Demonstration stocking

Demonstration stocking is a form of dealer finance used to fund demonstration vehicles. It is important to contact the dealer, check their liability and get written confirmation that they will clear the outstanding finance on the car you are buying. 

Miscellaneous

If the vehicle you have looked into shows up as ‘Miscellaneous’ finance we encourage you to obtain more details from the finance company and the seller of the car 

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