Do you think car financing is an easy method of buying a car? During this time, you may want to reconsider.
Auto financing has evolved over the years and it’s not as simple as paying monthly until you own it (although that’s an option if you want to). There are now several options when it comes to financing your next vehicle.
For UK car buyers, you’ll find three core paths to choose from when making that all-important decision – and we’ve broken them down here:
1. Hire Purchase (HP)
Hire purchase (or HP financing) is the most traditional form of financing – financing that has been offered for years by car financing lenders.
You start the process by making a down payment, before agreeing to a fixed amount of monthly payments with a fixed interest. With this type of car financing, you have no mileage restrictions or worries about excessive wear and tear.
While this may not offer the cheapest monthly option, once the final payment is made, the car will be in your full ownership.
Those who may have a bad credit score will need to look to HP Finance if they want to get approval for auto financing, as it is much harder to get credit on the next financing type we will examine.
In this position, it’s always a good idea to try a soft search eligibility check beforehand to see if you stand a chance of being approved without further hurting your credit score.
2. Personal Contract Purchase (PCP)
If you like to stay flexible, Personal Contract Purchase (PCP financing) is probably for you.
PCP financing is not set up to guarantee ownership – although that is an option – and most of the car’s value is actually tied up in an optional final payment that, once paid, would make the car yours.
Because of this optional payment at the end of the contract, the monthly payments will likely be cheaper compared to an HP deal, essentially paying to cover the depreciation of the car until you reach that final payment.
A down payment and a fixed number of monthly payments are where the agreements between HP and PCP end. In addition to the optional final payment, you must also set a mileage limit for the contract and track any damage in addition to general wear and tear.
If you exceed your mileage or cause too much damage, you will likely pay too much to cover the cost if you choose to return the car.
The end of the contract is also a big change from HP as you get three core options:
Make the final payment and become the owner Exchange the car for a new one using the equity in the vehicle Walk away completely
3. Personal Contract Rental (PCH)
Personal Contract Hire (or PCH) is a form of car leasing. It may be a more suitable option if you want to switch cars more often.
Depreciation can often keep you from buying a brand new vehicle, but getting a car on personal contract can solve the bypass problem. A car dealer can provide you with a new car every few years, and you don’t have to worry about it.
When you enter into a car financing agreement with a personal rental contract, you must decide on your mileage limitations and the total duration of the agreement. You essentially pay for what you use and can offer a prepayment (also known as an initial rent) to make your monthly payments cheaper.
After that, you’ll start with your monthly payments – you can even take advantage of some additional benefits, such as maintenance packages that ensure that your payments cover annual maintenance.
Apply for financing
You can often start your car buying journey with a free fitness check. Many auto companies have them and you can use them to check your eligibility without impacting your credit score.
You can then go ahead and go through a full financing application, which includes a hard credit check. At some point, every car financing lender will do a hard credit check.; however, if you’ve checked your eligibility beforehand, with positive results, you can move through this phase with confidence and work towards a new car.
This post Choosing the best car financing option for you was original published at “https://www.noobpreneur.com/2022/04/08/choosing-the-best-car-finance-option-for-you/”