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Which is better: Car finance or a loan?

Cars
Buying a shiny new car is an exciting experience. Being handed the keys, that new car smell and of course the proud moment you drive it off the forecourt. But before the happiness begins you’ve got to pay for it first. Having the cash to buy a new car upfront is the ideal situation, but as it is the second biggest purchase for most after a house, many of us need help paying for it. A loan or car finance are both good ways of paying for a car over a period of time but which is better?

Car finance

With car finance you pay for your vehicle purchase in monthly instalments, directly to the dealer or car manufacturer. There are three types of car finance:

Hire Purchase (HP):

With this method you’ll pay an initial deposit and then pay off the whole value of the car in monthly instalments. When you finish the payments the agreement ends and the car is yours.

Pros:

  • You’ll be able to drive your car straight away
  • You don’t need to estimate your mileage at the start, so you won’t be caught out by excess mileage charges
  • You’ll own your car straight after your last payment

Cons:

  • If you don’t pay the monthly agreed instalments there is a chance your vehicle will be repossessed and could negatively affect your credit rating.
  • Because you’re paying off the full value of the car the repayments will be higher than other options, however this will all depend on the agreement made between the customer and dealer (in addition to other factors).

Personal Contract Hire (PCH):

Because of the long-term nature of PCH it is ideal if you aren’t looking to buy the car at the end of the contract. You’ll be leasing the car for a set period of time, with fixed monthly payments and when it expires you can return it, or change it for another.

Pros:

  • It’s flexible, so you can change your car for models that you may not have been able to afford
  • Zero hassle. You won’t have to worry about reselling it or the warranty running out
  • The monthly repayments will be a lot lower than if you were buying it (monthly repayments are worked out differently per individual, chat to your dealer for more information on the best prices for you)

Cons:

  • You can’t buy the car at the end
  • You have to estimate your mileage at the start of the contract and will be charged if you exceed it
  • You’ll need comprehensive car insurance and it isn’t included

Personal Contract Purchase (PCP):

This way of paying is similar to a Hire Purchase agreement in that you pay a deposit at the beginning and follow it up with monthly payments. The difference between the two is that your monthly instalments are solely to pay off the depreciation of the car, instead of its full value.

From the beginning of the contract you’ll agree a Guaranteed Future Value (GFV), which is an estimate of your car’s expected value at the end of your contract. So what you’re borrowing and paying back is the difference between what the car is worth now and what it’ll be worth at the end of the contract (the depreciation). This sum will be what you pay back in monthly instalments. This means the payments will be really low, but if you want the car at the end you’ll have to pay the agreed GFV.

Once you’ve paid your last monthly instalment you have a few options. You could pay the GFV, give the car back with nothing outstanding to pay or part exchange it towards a new car.

Pros:

  • If you don’t want to buy your car you can walk away after the last monthly payment
  • If the car is worth more than the GFV you can use the equity towards a deposit on a new car
  • Like PCH you could upgrade to a new car every few years without having to worry about selling it or it running out of warranty

Cons:

  • You’ll need to pay the GFV to fully own the car
  • Like PCH you’ll have to agree an approximate mileage limit at the start of the contract and will be liable for charges if you exceed it

Shopping around for the best possible deal is critical with car finance as you don’t want to miss out on a finance offer. These can include deposit contributions, low or interest free APR rates and as these offers aren’t set in stone, it is always a good idea to try and negotiate the price.

Car loans

Going to the bank or building society for a loan to pay for your new car is another possibility. Because of recent financial troubles loans have been harder to get, but the appeal of owning your car from the outset makes it an attractive option.

Loans can seem easier to navigate than finance, because comparison sites can show you the best deals at a glance. The annual percentage (APR) is the best way to compare these and will detail what you’ll pay on the loan over its lifetime. The major downside to a loan is that your possessions will be at risk if you defer on a payment, whereas with finance only the car can be repossessed.

Pros:

  • No mileage limitations
  • No deposit
  • Owning it up front means that you can sell it if you want to

Cons:

  • Always be aware of the APR interest rates. Some dealers can charge APR rates on the outstanding amount, which can make monthly payments more expensive. Always check the APR rate before agreeing to monthly payments.
  • You could be refused if you have bad credit
  • Lender may increase interest rates after application

There are clear plusses and minuses to both methods of buying a car and which is better may come down to your personal circumstances. If you can’t afford to pay a deposit for finance, then a loan may be perfect for you. But if your credit rating is bad, car finance would be the best route. Whichever option you go for research is key. Shop around for the best possible offer and don’t be afraid to ask questions for a detailed picture of your deal.

For more information on car finance, take a look at our past article:

https://www.wewantanycar.com/news/car-finance-options-explained/

 

Resources:

WeWantAnyCar merely provide information to readers based on shared information found in the below resources:

https://www.parkers.co.uk/cars/advice/buying/2013/november/personal-loan-vs-car-finance/

https://www.whatcar.com/car-advice/buying/car-finance-explained/3485458

https://www.arnoldclark.com/newsroom/006-pcp-pch-or-hp-car-finance-explained

https://glensidefinance.co.uk/pros-cons-hire-purchase/

https://www.moneysavingexpert.com/banking/interest-rates

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