Car finance explained
When buying a car you need to decide whether to use savings, or get some form of finance. Using savings is often the cheapest way to purchase a car so it's likely a good decision if you can. However, many of us aren't in a position to buy a car outright, so finance is often a great option.
There are many types of finance so it can feel like a minefield trying to understand the best product as a consumer. Furthermore, the most suitable option differs from person to person depending on your credit history, the value or details of the car you're looking to buy, as well as your personal circumstances or goals.
Motiv considers a range of finance types, to try and help you find the most suitable option when buying your next car. The main products compared by the service are explained below:
Also known as a unsecured loan or a bank loan.
This type of finance can offer great flexibility as if you are approved the finance company will pay the money straight into your bank account and you can use it for any purpose, including buying from a private seller. However, depending on your circumstances (for example if you have a poor credit history) you may not be eligible to get the best interest rates. Luckily, you can use the Motiv service to see what interest rates you can get in most cases!
The fact that the loan is unsecured means you are not borrowing the money against the value of one of your possessions. So, if your personal circumstances change and you struggle to meet your monthly repayments, the finance company can't repossess your car or home.
Hire Purchase / Conditional Sale
Hire Purchase and Conditional Sale agreements are similar. They are both secured against the car you buy. You will be the registered keeper of the car, however, the finance company will own the car until you make the final payment at which point it's yours. If you don't keep up with the repayments your car can be taken away from you. As the finance company has some security, they are typically able to offer you cheaper interest rates when compared to an unsecured loan, so depending on your circumstances (for example if you have a poor credit history) they can be a good option to consider.
Personal Contract Purchase (PCP)
Like Hire Purchase, with Personal Contract Purchase (PCP) the finance company has security in the form of the car, so if you don't keep up with repayments they can take it away.
With PCP, you only pay down the expected depreciation of the car. In practise this means the finance company will set a guaranteed minimum future value (GMFV) for the car which will depend on many factors including the car, your expected annual mileage and length of the finance agreement. At the end of the agreement, you then typically have three options:
- Pay the GMFV (often called a final payment or a balloon payment) and take ownership of the car
- Hand the car back to the finance company. Note: excess mileage charges can apply if you've exceeded your agreed annual mileage
- If the car is worth more than the GMFV then you might be able to trade it in and use the difference towards your deposit on a new vehicle. Note: excess mileage can reduce the trade in value
This product has grown in popularity as it means monthly payments can be substantially lower making a newer or more expensive car more affordable. However, you will end up paying more interest compared with a Hire Purchase agreement or Personal Loan of the same interest rate, you won't own a car at the end of the agreement without paying the final payment and excess mileage charges can apply if you go over the annual mileage that the agreement is based on.
Hire Purchase Balloon
This option is the same as standard Hire Purchase with one key difference – there is a larger balloon payment deferred to the end of the agreement meaning the initial monthly payments are lower.
This may sound like "Personal Contract Purchase", however a key difference is that the final balloon payment is not optional, and the future value of the vehicle is not guaranteed. Hire Purchase Balloon may allow more flexible monthly payments to be agreed for vehicles that are likely to have a particularly strong value retention, for example a classic, prestige or super car.
If the finance cancellation request is accepted, then it will need to be repaid in full. For Hire Purchase or Personal Contract Purchase (PCP) agreements, this will involve the lender reversing the payment with the car dealership and arranging for the car to be returned to them, whilst for a Personal Loan, unless you are yet to make the car purchase it will be down to you to agree a refund with the dealer directly. In either case, you should not assume the dealership will automatically be willing to take the car back. In particular, if you bought the car on the premises of a car dealership and signed a vehicle order form at the location, you may be legally required to pay for the vehicle in full which will require you to have funds available or alternative finance agreed.
Also, if you paid an initial cash deposit, this may not be refundable – even if they do take the car back.
For unregulated agreements, this option may not exist and will depend on the terms you sign up to.
Note that unregulated credit agreements may not offer the same flexibility for early settlement, so Motiv suggest you understand this before signing up to such an agreement.