How to Finance Your Dream Car: A Comprehensive Guide
Securing the right financing is a critical part of the car-buying process but after finally deciding on which of the many Makes or models you are going to drive away are you in the mind for thinking finance through ?!
Some will have researched and have decided which method of finance works best for them but the majority leave making this decision until their dream car is secured and then it can be a lot to take in, so we have come up with this guide on the various ways to finance your new or new to you car.
Most car dealers offer 2 main sources of car finance. Hire Purchase and Personal Contract Purchase both listed and detailed below. Whilst Personal contract purchase (PCP) has been around for a long time it is becoming a more popular method in the last 8-10years due to varying factors such as the need/desire to keep monthly payments low, people’s buying habits have changed and change their car more often and other varying factors.
HIRE PURCHASE (HP)
You can put down a deposit / some finance companies will finance without deposits. If you do put down a deposit it helps keep the payments down.
The rest of the car is then paid off in instalments over a period of one to five years. The longer this period, the less you have to pay each month but due to interest charges, the total cost of the car becomes higher.
You can (with the majority of Finance providers – advised just to check this with each specific lender )pay off extra to reduce your term or monthly payments at any time throughout the agreement without incurring financial penalties.
The Rate of interest is fixed and therefore your monthly payments are fixed throughout your chosen term
When you pay the last payment of the agreement you will own the car.
You can exit the agreement at end time by paying the total amount owed in full.
PERSONAL CONTRACT PURCHASE (PCP)
This option is quite similar to opting for a hire purchase agreement you can put down a deposit and the higher the deposit the lower the payments
The main difference is in PCP agreements the car has an end value (referred to as the Guaranteed Future Value) which is voluntary and which you will know the exact figure at the start of the agreement. If you wish to keep the car then you MUST pay the end value figure – it will not change from when you took out the agreement.
The Monthly Payments are often less than what you’d pay in a hire purchase agreement as you pay the full price of the car, plus interest but minus the guaranteed future value of the car.
Your Monthly payments will be based on an annual mileage allowance, minimum annual allowance are put in place by some finance companies i.e. minimum of 8,000miles/annum. The higher the annual mileage allowance you choose the higher the monthly payments will be – but with a lower End value and vice versa, as more miles are seen to be of decreasing value.
At the conclusion of your PCP agreement you have three options.
- You can either pay off the future value of the car to become the full owner.
2. Hand back the keys to the Finance provider. (one thing you must be aware of with this agreement is the danger of exceeding the forecasted mileage. If you exceed the mileage on the car, there will be further charges to pay. This is because more miles decrease the value of the car. Also, any damage to the car will be charged to you, so you must be prepared to take good care of the vehicle).
3. Trade the car in as a deposit for a new finance agreement. (if there is positive equity between the End agreement price and the current value of the car this can leave you with a deposit for the next car purchase)
Considering all the options, your dream car isn’t as far out of your grasp as you might have thought. As we can see, there are a range of finance options available to you for purchasing new cars — allowing you to drive that dream car you’ve always wanted without forking out loads of cash. Save up what you can for a deposit and always make sure that you can cover the payments before signing any agreements.
You must pass credit checks before you’re eligible for a HP or PCP agreement.
If you can afford it, it’s a good idea to put down a larger deposit, therefore lessening the amount you have to pay back monthly.
Think about your purchasing cycle – Do you keep your cars a long time ? Is HP more suitable ? Do you prefer to change more often and don’t mind paying an agreed monthly figure? Then possibly PCP is a good option.
Always evaluate your current monthly payments before you agree to a finance agreement, as being behind on your payments can lead to financial issues.
For more info check out our Finance explainer videos on our Finance services page! Kindly provided by one of our financing partners V12 Finance.
This is a blog wrote for information purposes only and does not constitute or should be taken to constitute financial advise – Always ensure you are 100% clear on any agreement you sign If you don’t feel confident in the agreement then seek independent advice.