The Ultimate Guide to Car Finance
When buying a new or used car and considering payment methods, you’ll most likely consider using car finance, as opposed to paying outright, with a bank loan or by credit card.
Car finance gives you complete control of how you pay back borrowed money to purchase the car of your dreams, which depends entirely on the cost of the car and the deposit you decide to put down.
With 80% of new cars in the UK purchased with finance, there’s no surprise why it’s one of the leading payment methods when purchasing a car. As with all types of finance agreement, it’s important to know and understand what you’re getting into before making an informed decision.
This guide takes a look through the basics of how to finance a car and how to choose which car finance option is best suited for you.
How does car finance work?
Car finance works by splitting the cost of a vehicle into a deposit and a number of monthly repayments to make the cost more affordable to car buyers. The car is sold to the finance lender and then the car buyer will need to make these payments back to the lender to eventually pay for the car.
With some forms of car finance, you’ll need to put down a deposit which will reduce your monthly repayments. You may have an option to not pay a deposit, but repayments will be much higher and may even lead to an increase in the interest you’ll need to pay back along with the finance.
There are different types of car financing options, including personal Car Hire Purchase, Personal Contract Purchase, and Personal Contract Hire.
What are the benefits of car finance?
Whilst purchasing a car outright with cash means you own the vehicle straight away and is usually the best option, buying a car using finance has a variety of benefits. The main benefit is the ease of accessibility for those who are looking at buying a car, but aren’t keen on making a large sum payment.
If you’d prefer to pay by cash but are some way from the purchase cost of the car, you can use any amount of cash to put down as a deposit. For example, if you only have 83% of the costs to buy a vehicle, you can choose to take finance on the remaining 17%.
Choosing the right car finance for you
There’s more to financing options than simply ‘borrowing and paying back’. By looking through the available payment options and finance deals, we can help you decide what is right for you. We recommend setting a budget that suits you and aim to pay a higher upfront cost to reduce your monthly repayments.
Remember, even if your credit score is great and you’re able to borrow large amounts of money, it does not mean you will be able to afford it. Before settling on a budget, make sure you calculate your outgoings and be confident that you’ll be able to easily make all repayments throughout the full term.
Car Hire Purchase
Car Hire Purchasing is an easy way of financing vehicles with an option to use no deposit, with fixed monthly payments over an agreed period of time. Unlike a personal bank loan, the car technically doesn’t belong to you until the final payment is made. Once you have paid more than half of the finance off, you’ll be able to return the vehicle and will not need to make any further payments.
Normally, rates on used cars are not as good compared to rates on a new car, however, at Parkland Motors, we offer great financing options which are just as competitive as new car dealerships.
Personal Contract Purchase (PCP)
A Personal Contract Purchase (PCP) is another way to finance a vehicle, which is similar to a hire purchase, however, it can sometimes be less cost-effective. After your finance contract ends, you’ll have a few options to consider, including; paying the resale value to keep the vehicle, returning the car to a dealership in a part-exchange deal, or using the resale value towards buying a new car.
You will usually have to pay a deposit of around 10% of the value of the vehicle, but this is flexible. You’ll also need to state your annual mileage when using the car, which may incur in extra fees if you go beyond the agreed number of miles. This may seem like a surprise to some, however, higher mileage depreciates the value of a vehicle and if you’re planning on returning the vehicle after the period is over, it will be worth a lot less due to the higher mileage.
If you decide to keep the car at the end of the agreement, you’ll have to make a final payment (also known as a balloon payment) which is based on what the dealer believes the car is now worth. You must have paid at least half the value of the vehicle if you wish to end the contract early or cancel it, this can differ depending on your agreed contract.
Excessive wear, tear, and damage, including scratches, can mean that you will be charged extra at the end of the contract if you do not decide to keep it, otherwise you may need to pay for repair costs.
Personal Contract Hire (PCH)
A personal contract hire plan (PCH) is a type of vehicle leasing where you never own the vehicle. Of course, this is a much cheaper option than a PCP if you decide to return the vehicle after the agreed term.
To avoid additional costs, use the vehicle and keep to your mileage agreement. Costs such as maintenance and vehicle excise duty (car tax) are included with a PCH, so you’ll only be required to pay for fuel and vehicle insurance. Similar to a PCP, you will be charged extra fees if you go over the mileage in your contract, and you will usually have to pay certain charges if you decide to terminate the contract early.
Keep the car in good condition when you return it towards the end of your agreement. Usually, normal wear and tear is allowed, but it does depend on your agreement.
Whilst a bank loan isn’t financed through a dealership or a car finance lender, it’s a method of sourcing funds to own your car outright, without needing to place a deposit.
The other benefits of using a bank loan to finance a vehicle is that unlike some of the finance options listed above, there won’t be any limits on mileage or additional fines for wear and tear. It also means that after the bank loan is paid off, you will be able to keep the vehicle without needing to return it, however, the vehicle will have depreciated by the end of the term with a decreased value.
We do advise to look around before committing to a bank loan, as bank interests are usually very high.
What documents will I need to finance a car?
When financing a car, you’ll need to take along some important documents to prove your identity, income and address. You will need:
Proof of identity (driver’s licence or passport)
Proof of income (three months of bank statements / payslips)
Address history (for the previous three years)
Deposit (this will only apply if your financing option requires a deposit or if you choose to place an optional deposit on your chosen vehicle)
Why choose us?
At Parklands Motors, we offer a selection of payment plans for you to find the right car loan. Our in-house fast track system allows us to arrange finance promptly and efficiently to ensure that you are getting the best value for money. We provide the facilities to offer flexible finance deals to suit almost any budget!
Finding your next car on finance can be just a few clicks away, browse through our extensive range of quality used cars and simply click on the apply for finance link and one of our finance specialists will be in touch to secure the best finance deals suitable to your budget.
We pride ourselves in making your buying process easy and hassle-free. For your peace of mind, all of our vehicles come with a minimum of 8 months MOT, up to date oil service, and also go through a rigorous 85-point pre-delivery inspection prior to the collection/delivery of the vehicle.
Contact us today for more information on our cars and services.