Take The Confusion Out Of Car Finance By Shopping Online
The decision on how to finance a car purchase can be more complex than locating the right car that suits your needs and most of us will need to consider financing this type of purchase as we don't possess the amount of cash generally required. So what are the options and how do you know what's best for your circumstances?
There are really four popular ways to finance a car:
1. Hire Purchase
This is the traditional way of buying a car if you don't have the full cash payment. Rates and initial deposits tend to be low and occasionally you may be able to negotiate a lower rate of interest with the sales team, especially in this current economic climate where car sales are struggling. At the end of the term, the car is your property. However, since the loan is secured on the car, failing to keep up with the monthly repayments may result in its repossession.
2. Personal Loan
Personal loans are more attractive than ever before because of the low rate of interest that currently exists, and because people believe that by offering cash, they will get a better deal. However, car salespeople make commissions on a finance arrangement, so they are more motivated to offer you a better deal if you don't offer cash. It makes good sense to compare the rates you are offered with other financial loans.
3. Extending Your Mortgage
Although this method offers a very low monthly payment, it does mean that you'll still be paying for the car for the duration of your mortgage – which can be 20-25 years – by which time the car will most likely have been replaced several times. This long repayment term will result in a much higher credit payment and therefore a much bigger overall price for the car. The complications and costs involved in arranging this type of finance heavily outweigh the benefits, and so it is only worth a consideration if you already plan to switch mortgages or move home. Most importantly, the loan will be secured against your property so defaulting on payments could result in you losing your home.
4. Personal Contract Plans (PCPs)
These have a huge variety of names depending on the brand of car you are purchasing, but they all follow the same logic. First you will pay an upfront deposit, followed by low monthly payments over a fixed term, usually two or three years (the longer the term the lower the payments). At the end of the term you will have three choices:
a. Make a final payment to keep the car
b. Return the car and walk away (this is dependent on not exceeding a specified mileage limit and keeping the car in a good condition)
c. Trading in the car to pay part of the deposit on your next car
PCPs tend to be ideal for people who change their car frequently and also prefer a low monthly payment, as they are often able to take a more expensive car than expected. PCPs often include maintenance and service charges and you can usually guarantee a second-hand value for the car.
To help you decide which finance option to take, the Government has some sound advice about the pros and cons of each option, as well as guidance on alternative forms of credit as well as a budget calculator to help decide how much you can afford to repay.
Once you know what you are able to afford, and have made an informed decision regarding which option suits you best, there are a few comparison sites that will help you find the best deal that suits your personal needs. Moneysupermarket.com, gocompare.com and tescocompare are three of the main players who will give you comparisons on the best car loans currently available. They will also tell you which financial institution is offering the best mortgage deals if you are looking for a new mortgage and plan to add cash for a car to your mortgage amount. Moneysupermarket will also give you a comparison on the best HP deals on the market.
If you plan to purchase your car on a PCP, don't assume that every dealer for that brand of car will match the same terms. Compare dealerships around the country as you will be surprised at the difference in quotations and you are bound to find something even better somewhere else. You may end up buying a car through a dealer 200 miles away to get the best price, but it will be worth it. (And they should deliver the car to your door anyway.)