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Car finance

When taking out car finance there are a few options available which you should take into account, you should also look for what car finance rates are being offered by the various car finance companies out there. You may already have a car which you would like to part ex, if so it is always a good idea to purchase a guide or check online to make you aware what the part ex value of your car is as this will help you when negotiating with a dealer. If you do not have a car to part ex then try to have a deposit available for your purchase as this will lower the payments and may make available better finance deals on whichever type of loan you choose.

New and Used Car Finance Options

Hire Purchase

Can be arranged through the car dealer, but if you think that the annual percentage rate (APR) is too high ask the dealer if they can find a better deal as you feel that the payments are too high. Remember that the dealers are paid commission on the loans which they sell and so they usually have some room for negotiation. Use this to your advantage and if you can, have a look at a price comparison site before you even enter the dealership so that you are aware of what loans are currently available. There are other advantages of HP deals read on to find out more.

Personal Car Loans

This would be arranged by you and probably would be wise to have a personal loan acceptance in principle in place before you enter the car dealership as otherwise you may see the car of your dreams and end up losing out because you cannot get your finances in place before someone else comes along and snaps up the car. The advantages of a personal loan is that again you usually find that the APR can be quite low, check our Loan Calculator to check the costs, though if you were to miss payments the car would not be repossessed but as mentioned in HP your credit rating could be damaged and you could even have a CCJ registered against you.

Personal Contract Plans

PCP's are arranged usually by the dealership and are an ideal loan if you regularly change your car, do not do a great deal of mileage and want to keep your repayments as low as possible as the payments on a PCP are usually significantly lower then those on a HP or Personal Loan.
They work in the way that only a percentage of the car is financed and your repayments are based on that amount, then at the end of the term (which is often 2 or 3 years) you bring your car back to the dealership and have 2 options. Read on for more details on PCP plans.

0% Finance

Dealers sometimes offer 0% finance deals on certain cars, this is usually for a limited period and the finance is not actually 0%, it is just that the dealership pays the interest for you. 0% finance deals usually come with very specific terms and conditions such as 50% deposit and short terms such as 1-2 years. If you do not have 50% deposit have a look around to see if you can actually take a loan for the 50% as it may be even with 2 loans running that the repayments are still lower than on a normal finance deal. As always with any loan check your finances to make sure that you actually can comfortably afford the repayments of both loans.

Mortgage Further Advance

You could choose to take a mortgage further advance and you probably would find that this is the lowest interest rate as mortgages do tend to be able to offer the lowest interest rates for loans. However, depending on the term you choose, the loan could be longer and the overall the cost could be higher.

You may decide that this is the best type of loan for you as the repayments are much lower and easier to manage due to the longer term but ultimately you must take into account that the best way to compare loans is not to look at the repayment amounts. Instead look at the overall cost, quite a number of loans will apply additional charges such as set up fees, closing fees, early settlement fees and administration fees so all these must be taken into account. Also consider that if you take a long term on your loan you could end up paying much much more back than the value of the car and also still have the loan long after the car has been sold on.

The other risk with a further advance is if you cannot keep up the repayments, it will not be your car which is at risk of repossession but your home, so always make sure you have considered all available loan options before proceeding.

Lease Hire

Another option to consider when looking for your next car is Lease Hire, however this is as it implies and you would only be hiring the car and not actually paying towards it's purchase.

With lease hire you are given a brand new car, you make monthly payments for the loan of that car and at the end of the term you give it back. There are terms and conditions applied to Lease Hire and it is wise to ensure that you fully understand these before signing up.

But basically you are paying the cost of the potential depreciation of the car during the time you own it, for example, If you choose to buy a Honda Civic Type R :-
* From new you would be looking to pay around £18,300
* And for one around 3 years old then you would set back in the region of £10,0000.
With lease hire for 3 years your monthly installment would be £275 or thereabouts, meaning that after 3 years you would have paid £9,900 for the hire of the car.
If then the lease hire company were able to sell on your old lease car for £10,000 that would mean that they would made an additional amount of £1,600 on their investment, and you would have paid an additional £1600.00 on top of the value of the car.
However, if you were to have taken the car on a finance deal you would have been charged interest anyway so in that respect you may end up around about breaking even on cost, but you will not own any part of the vehicle where as with a loan, although at this stage you may still in negative equity at least you would be on the way to buying the car outright.

Where Lease Hire is concerned, it really does depend what your priorities are, if you want a new car every 3 years and are:-

1) Never bother about owning it.
2) Want to avoid negative equity.
3) Are able to comply with the Terms and Conditions imposed.
Then Lease Hire could be for you.

However, if you want to:-
1) Ultimatley own your car.
2) Don't mind waiting until you are out of negative equity before you Part Ex or Sell your existing car.
3) Are willing to shop around for the best car finance deals.
4) Able to manage your finance commitments well.
Then buying your car is probably the better option for you.

Negative Equity

Be aware of negative equity as at some point in most car finance you will find that your car is in "negative equity", basically this means that the value of your car has depreciated quicker than you have reduced the balance of your loan, and so if you decide to trade your car in during this time this is a hazard of which you need to be aware.

The result of this is that you will have to wait before you trade your car in, OR cover the difference yourself by cash payment or additional finance.
However a worse situation may occur where you are in a car accident resulting in your car being written off, and find that the insurance company will only pay out the current value of the car rather than what you owe. This could leave a short fall which you would be responsible for and may make you decide that for peace of mind you would like to take out protection for this type of event (eg: GAP insurance).

Comments

• Thanks for the guide. I would like to know how car leasing / contract hire compares with the different finance options especially with car residuals being hit by the recession.

   

  Recommend 8 Report abuse2 months ago by Andrew Dean

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