Understanding Car Finance

Blog post   •   Feb 08, 2011 14:05 GMT

There are many different ways to buy a car, with most people being set in their ways on how they’re going to fund it. For instance, many people purchase used cars with cash saved over a few years and then purchase a car that they can afford. Whilst this might be suitable to some, it’s not an option for of the majority of buyers that comprise the “new car” market. In fact 80 percent of people who buy a new car do so by taking advantage of some type of car finance deal.

If you’ve read those last few words – “some type of car finance deal” – and are nodding as you’ve taken your car out on finance but don’t understand fully what different options are available, don’t worry – not many people realise that the term car finance typically relates to three types of different finance options. It is obvious, that using car finance means that you can get a car that you wouldn’t have been able to afford had you bought it outright. However, having an understanding of each of the different options helps you can get the car you want for an affordable monthly payment.

To begin with, you have Personal Contract Purchase (PCP), a type of car finance that is a form of car leasing. If you take a car on PCP it means that you don’t actually own it and you lease it from a company for a specific period of time, which is generally between two and four years. As it is cheaper than other forms of car finance such as hire purchase or car loans, it means that you can often be able to get a car that you wouldn’t normally be able to afford. This is because you don’t have to pay for the full car (ie; you pay for the total cost of the car less an agreed balloon payment), and therefore your monthly repayments are greatly reduced. It is flexible because you have the option to buy the car at the end of the agreement by paying the balloon payment.

Next you have hire purchase. This is more suitable if you aim to own the car at the end of the agreement. However, your monthly payments will be greater to account for this and you’ll also be expected in most cases to provide more money upfront.

Thirdly, there’s a personal loan, an option that can be used if need be, but with just 13 percent of the people who use car finance to fund their purchase using a personal loan this suggests that there are reasons why it is the least popular. It is often the most expensive (in terms of monthly payment).

Using some of the forms of car finance might mean that you don’t own the car outright straightaway. However, actual ownership of a car is something that seems to be less important on most drivers’ priority list. It seems that the majority prefer the ability to drive a car that they want, at a fixed, affordable monthly price and aren’t fixated on owning the vehicle upfront.