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Car Finance Schemes

By: Jeff Durham - Updated: 10 Mar 2013 | comments*Discuss
Car Finance Schemes Car Finance

There are a number of ways you can finance the purchase of a car these days and to the uninitiated, the choices can sometimes be daunting. However, it is important that you make the right choice in car finance as you can end up paying more than you bargained for, if you make the wrong decision.

Below is a description of the most common ways of financing a car with an outline of the pros and cons of each.

Personal Contract Plans (PCPs)

With this form of finance package, you pay a deposit upfront and then pay subsequent low monthly payments. After 2 or 3 years, you are faced with 3 options. You can pay what’s called a ‘balloon’ payment and keep the car. When dealers talk about ‘balloon’ payments they’re referring to a final one off larger repayment at the end of the series of much smaller repayments. You can simply hand the car back and walk away but to do this you must ensure that the car is still in good condition and the dealership will have required you to keep within a certain mileage limit. Alternatively, if the car’s value remains higher than the balloon figure (which is the norm but not guaranteed), then you can use the difference and set that aside as a deposit (or part of your deposit) on your next car.

The main advantage of PCPs is that, due to the low monthly repayments, you’re more likely to be able to drive around in a more expensive car than you would otherwise be able to afford. You’ll often be able to also include any maintenance charges in the payment and, possibly its greatest attraction – it’s easier to change your car every few years and receive a guaranteed second hand value to the car. Therefore, if the car ends up being worth more than its estimated value, you can sell it on and be in profit or if it’s worth less, you can simply hand it back to the finance company.

However, interest charges do tend to be higher due to the balloon and if the balloon payment is too high, the car may end up being worth less than the balloon payment so you may end up not having a sufficient amount of money to put down as a deposit on your next car. So, the key thing is to ensure that you’re going to be able to afford the balloon at the end of the term or else your only option then would be to take out another new loan to use as a deposit on your next car.

Hire Purchase (HP)

This is where the finance is arranged through the dealership itself. The benefit of a buying a car this way is that once you have completed the term of the agreement, the car belongs to you. Rates tend to be pretty low and your deposit will also be quite low – around 10%. As far as the actual amount of interest is concerned, you may be able to negotiate that with the dealership and, because they want your business, they’ll often lower the APR to secure the sale. However, if they don’t, it’s well worth checking out other finance companies in order to get a lower rate that will save you money. The loan will be secured on the car, however, unless you make your own arrangements, so it can be repossessed if you’re unable to keep up with the repayments which also tend to be higher than for PCPs.

Personal Loan

Many people mistakenly believe that they will get a cheaper deal on their new car if they offer the dealership cash and so they choose to take out a personal loan to enable them to do this. However, car dealers are incentivised to arrange finance for you as they receive a significant amount of commission for doing so. Therefore, it’s in their interests to make you a better offer. As mentioned earlier, it’s better to let them give you a quote and then you should do some research to see if you can get a better deal. The main advantage of taking out a personal loan, however, is that it won’t be secured on the car so it cannot be repossessed and also the total amount of interest you’ll have to pay is likely to be lower compared with other options. So, with this option, it’s always better to find out what the dealer is prepared to offer you first.

Extending Your Mortgage

This option might be considered if you do not have a lot of ‘movement’ in your current financial situation as the cost of the car can be spread out over perhaps 20 years but that means that the car will have long gone by the time you’ve completed repayments and your overall repayments will be higher in the long run. It’s also more complicated to buy a car this way and takes far longer to arrange and, if you fail to make the repayments, the consequences are dire as you could end up losing your home.

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