Don’t know your HP from your PCP? Or the difference between a personal loan and a guarantor loan? Well, you are not alone. With so many acronyms being flung around and many different types of car finance advertised, it can be confusing.
Here at Car Loanz our aim is to help you find the most appropriate car finance package for your own unique circumstances and we are happy to provide help and advice on any aspect of the finer detail that you may not understand.
In the meantime, however, here is our layman’s guide to car finance:
Firstly, car finance is a general term that is used when you buy a car and pay for it over a number of months or years. It is important to remember that the lender owns the vehicle until such time that you have cleared your finance agreement with them (ie. when you have made your final payment).
Hire Purchase (HP)
You pay a deposit (optional) and then pay off the balance in regular, monthly instalments.
- you own the car at the end of the agreement
- receive lower interest rates than some other forms of car finance
- fixed monthly cost over a fixed period (up to 5 years)
- the most commonly used form of car finance
- typically, the option of choice for people with an impaired credit history
- no mileage restrictions imposed
- the agreement can be settled at any point by requesting a settlement figure from the lender
- can be more expensive for shorter agreements
- the loan is secured on the car, so if you don’t make your regular monthly payments, the vehicle can be repossessed
Personal Contract Purchase (PCP)
This is where you pay a deposit, plus regular monthly payments for a set period of time, typically 36 or 48 months. At the end of the term you give the car back, or make a final, larger payment (often known as a ‘balloon’ payment or Guaranteed Minimum Future Value) to keep the vehicle.
- gives you the flexibility to either keep the car or give it back at the end of the agreement
- allows you to keep your monthly repayments low as a large lump sum isn’t due until the end of the agreement
- fixed cost, fixed period loan of money that is linked (or secured) to the purchase of a vehicle
- if you give the vehicle back at the end of the term, you may be charged for any excess mileage or damage
- if you keep the car at the end of the term, you need to find a lump sum payment, typically known as the Guaranteed Minimum Future Value (GMFV). This is equivalent to the estimated market value of your car at the end of the term. This figure will be provided before you sign the agreement
- fixed monthly payments include interest on the full amount, including the GMFV but excluding the deposit paid
This is where you take out a loan and use it for buying a car.
- as you already have the finance agreed, it may put you in a better bargaining position with the seller / dealer. This is the case for using Car Loanz as we get you approved first, enabling you to negotiate your own deal
- the loan is not secured against the car, so you can sell it on at any time during the loan agreement (you still need to keep up with your repayments of course)
- normally a fixed cost, fixed period loan of money to purchase any item
- personal loans are an unsecured lending facility which means the lender can’t repossess your car
- if you have a less than perfect credit history, you may get refused for a personal loan
- maximum loan values do not usually exceed £25,000
This is a loan where a third party (perhaps a parent or friend) agrees to guarantee the repayment of the finance if you fail to keep up with your monthly payments.
- suitable for people who have difficulty in getting approved for finance
- if you keep up to date with the repayments, it can help rebuild your credit score
- fix your monthly repayments for a fixed period of time
- typically, these loans are unsecured giving you the flexibility to spend the money as you wish
- these loans may cost more than traditional forms of car finance
- you need to have someone who is willing to act as a guarantor and, in the vast majority of cases, the guarantor has to be a homeowner
This is just a brief overview of the types of vehicle finance available and should help you feel a bit more informed about your options. No matter what type of finance you choose, remember that:
- your credit history will be affected if you fail to keep up the repayments
- you should be 100% sure you can comfortably afford any loan repayments before you sign on the dotted line
- you are free to settle any agreement early (a small fee may apply, typically one month’s interest and/or an option to purchase fee)
- if your circumstances change during the period of the agreement or you simply fancy a different car, you are not stuck. In most cases you can part-exchange the vehicle. Any equity in your vehicle can be used as a deposit towards your new car
*Detailed information relating to the finance options is provided by the Lender and they will assess your suitability regarding the options available to you.