Before you choose a car finance option, it's worth considering the options to reduce your borrowing by choosing a different car or no car at all. Read do I need a car loan if you want to look at some practical alternatives.
Car Finance Options
When taking out car finance there are a few options available which you should take into account. Primarily, the finance rates are the most important and are usually expressed as an APR which offers a basis for comparison. If you have a car which you want to offer in part exchange it is always a good idea to purchase a guide such as Parkers, or check car valuations online, to make you aware of the part ex trade value of your car. 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 better finance available. You can use a car loan calculator to help you calculate the monthly repayments and total interest payable on the loan.
New and Used Car Finance Options
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. Always negotiate when buying a car and that includes the finance. Remember that car dealers are paid commission on the loans 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 competitive fiannce rates. There are other advantages of HP deals read on to find out more.
Personal Car Finance
Personal car finance would usually be arranged by you. It would be wise to have a 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 finance in place before someone else comes along and snaps up the car. The advantage of a personal loan is that it gives you the opportunity to shop around for a low interest rate before you find the right car. This will also help you set a budget of how much you want to borrow to buy your car.
If you were to miss payments it is unlikely that the car would be repossessed but your HP credit rating could be affected. Miss too many payments and you could even have a CCJ (county court judgement) registered against you.
Personal Contract Plans Explained
PCP's are usually arranged 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.
The way they work, is 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% Car Finance
Dealers sometimes offer 0% finance deals on certain cars, this is usually for a limited period to create extra interest. The loan is not actually 0%, it is just that the dealership pays the interest for you from the profit they make on the car. To find the true cost of credit, ask how much they can knock off the car price for a cash purchase. 0% car 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 that the total repayments on two loans are lower than an ordinary finance deal. As always with any loan check your finances to make sure that you actually can comfortably afford the repayments of both loans.
Car Finance through borrowing against your mortgage
A mortgage further advance would possibly give the lowest interest rate as mortgages do tend to offer lower rates than standard loans. You should be aware that the loan term could well be longer and therefore the overall cost of credit could be higher. Also, as mortgages are secured on your house you might put yourself in danger of repossession. We imagine this car financing option would best suit someone whose mortgage is nearly paid off and only has a few years left to run.
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.
Vehicle Lease Hire Explained
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.
Basically you are paying the estimated cost of the depreciation of the car during the time you own it plus profit for the finance company. 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. Note that Lease Hire will include a limit on the mileage expected at the end of the term and a financial penalty for every mile you do over the limit.
Where Lease Hire is concerned, it really does depend what your priorities are, if you want a new car every 3 years and :
1) don't care 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 :-
1) want to eventually own your car.
2) don't mind waiting until you are out of negative equity before you part exchange or sell your existing car.
Then buying your car might be the better option for you.
Negative Equity on Cars
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 which you will 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).
Car Finance Negotiation
Having just negotiated a great price for your next car don't forget to negotiate on the finance deal too. There could be a big saving so be brave. Be prepared to walk away if you don't get what you want.
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