These days, there are many different options available when it comes to car finance. Before worrying about your credit history, it’s important to explore the various alternatives and consider which choice is best suited to you.
A traditional form of car financing, a personal loan is a simple method of getting a lump sum together to purchase a new car outright. You can then pay back the loan via an agreed-upon repayment schedule at a fixed rate of interest. Personal loans are often a popular option for car buyers in a more stable financial position as they are rarely secured against your assets. This means less risk for you, but more for the lender, so you will often need a good credit score to secure a deal. By buying the car outright, you will be fully responsible for its ongoing maintenance and upkeep, covering any costs should something go wrong.
A credit card is a more traditional form of financing for car purchases than a personal loan. If you can secure a 0% purchase credit card, you could purchase your car outright and pay no interest on your credit for the length of time agreed in your contract. Credit cards are a flexible option as you can pay off varying amounts each month if you meet the minimum repayment, and the lack of interest means the amount borrowed will stay the same. Unfortunately, 0% credit cards often require a good credit history if you want to secure a high credit limit, so they are rarely an option for those struggling with a low credit score. As with other forms of outright purchase, you will also need to consider how you will cover the ongoing cost of maintenance and repairs should something go wrong.
Hire purchase is a form of secured loan. When you enter a hire purchase agreement, you will usually be required to put down a deposit and then make monthly payments towards the total cost of your car. Due to the nature of this loan, you will not technically own the car until you have finished making your payments and will often be required to pay an additional purchase fee to secure the vehicle. As this loan is secured against the car, you risk losing it if you fail to make your payments. However, this does make it a lower risk option for lenders, so it could be a choice to consider if you are worried about applying for finance with a low credit score.
Like hire purchase, 0% finance car deals often require the borrower to put down a deposit and then pay monthly repayments via an agreed upon repayment schedule. The main difference is that your finance comes with 0% interest – either throughout the agreement or for a set period – so you are likely to need to pay a higher deposit and monthly repayments. If you stick to the terms of your agreement, your 0% interest will continue for the period set out in your contract.
Car leasing is an alternative to owning a car. Rather than purchasing a vehicle, you simply make regular payments and continue to use the car if you are making payments. The level of payment you make is usually directly linked to the car’s value, but it is also influenced by the length of hire and the amount of mileage you will be covering. In general, car leasing requires smaller monthly payments than if you were paying off a car bought on credit, but there can be extra charges. For example, if you damage the car during the lease period, you may be required to pay a fee when you return it. Some lease companies will insist that you take out insurance to cover damage, which requires additional monthly payments. While you do not own the car, you will sign a contract when you secure your lease. Any breach of the contract, such as failing to make repayments, can result in a penalty fee.
Personal Contract Purchase (PCP)
A Personal Contract Purchase, or PCP, has become one of the most popular forms of car finance in recent years. The main reason for its popularity is the flexibility that this type of finance offers, but flexibility can also have its challenges. A complex option, a PCP can be used in various ways to suit the buyer and be altered throughout the contract. When you take out a PCP, you don’t buy the car outright. Instead, you put down a non-refundable deposit and borrow the remaining balance. You will then make monthly payments via a pre-determined schedule that will cover the costs of interest, along with the cost of the car’s depreciation throughout your plan. Once you reach the end of a PCP contract, you will have several options. Commonly these include:
- Buying the car: Pay the value of the car minus your initial deposit.
- Replacing the car: Trade the car in for a replacement and begin a new PCP plan.
- Returning the car: Assuming the car is in good condition, you can return it and walk away.
If you like the idea of having a new car and want to replace your vehicle as regularly as possible, a PCP plan could be an ideal choice. They also offer low monthly repayments as you are simply covering the costs of interest and depreciation. However, they often incur high-interest rates and require an ongoing monthly commitment to be a difficult form of finance to secure if you have bad credit.