HomeBUSINESSWhich Car Finance Agreement is the most Cost-Effective? 

Which Car Finance Agreement is the most Cost-Effective? 

If you’re looking to get a car on finance, you may be wondering which type of car finance agreement is best. In the UK, there are three main types of car finance which tend to be the most popular and it can be hard to know which is right for you. The guide below looks at each agreement in more detail and helps you decide which car finance deal is best for your circumstances and the most cost-effective. 

Hire purchase

Hire purchase car finance is one of the most popular ways to spread the cost of getting a car. A hire purchase agreement is a form of secured loan which means that the lender owns the car until the end of the agreement. Hire purchase is one of the most straightforward ways of getting a car. You make equal monthly payments with interest that reflect the value of your chosen car over an agreed term. Hire purchase deals can be spread over 3-5 years and you can use a free hire purchase calculator uk to see how much your loan could cost you a month. Once all payments have been made on time and in full, there is a small option to purchase fee to pay and you will then become the legal owner of the car. 

Personal loan

A personal loan may be one of the most cost-effective ways of getting a car as low interest rates are usually available. However, the best rates are usually reserved for those with good credit a score, and it may not be accessible if you have low credit. A personal loan isn’t secured which means that you can use the money from a lender to get any car you like. Most drivers usually borrow a set amount from the lender and then the money gets deposited into your account in full so you can go buy the car you want just like a cash buyer. You then make monthly payments over an agreed term. 

Personal Contract Purchase

Personal Contract Purchase is probably the most complex form of finance, but it tends to offer the lowest monthly payments, even on brand new cars! This is because instead of equally splitting the cost of the value of your chosen car, you instead pay off part of the vehicle and much of the value is differed until the end of the agreement in the form of a large balloon payment If you wish to keep the car at the end of the deal, you would have to pay the balloon payment first or you can find a lender who will help you refinance it. At the end of the agreement, you also have the option to hand the car back to the dealer or use the value towards getting another car on PCP.

What should you consider before getting a car on finance? 

Whilst there are so many benefits to owning a car on finance, there are a few factors you should consider before committing to taking out a car loan. 

  • Credit score. You will usually have to undergo a credit check before you can get approved for car finance as lenders want to know the likelihood of you paying your loan back on time and in full. When you’ve missed payments in the past or made late repayments, you will usually find yourself with a low credit score and this increases the risk to future lenders as your more likely to default again. Some likely may decline your application if you have a bad credit score or no history of previous borrowing. It can be a good idea to work on your credit score before applying for car finance to help increase your chances of getting approved and also the get a better interest rate offered.  
  • Budget. Most lenders may also want to do an affordability check on you before they accept you for finance as it goes against the rules of responsible lending that finance providers need to abide by. The responsible lending practice helps to protect people from taking out a loan that they could never afford to pay back. For this reason, lenders may ask to see bank statements or payslips to prove your income and work out how much you could comfortably put towards your car finance deal each month. 
  • Interest rates. Interest rates are really important when it comes to car loans and reflects the cost of borrowing. Choosing a high interest rate can make car finance way more expensive than it needs to be. The rate of interest is set by the bank of England and not having a fixed interest rate for car finance means your rate can fluctuate during your agreement. Where possible you should try to get a 0% car finance deal or choose an agreement that comes with a fixed rate. 

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