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The Mechanics of Car Finance

According to Mintel, since 2009, consumers demand for car finance has grown strongly. Nearly 2 million plans were sold at point-of-sale through dealerships in 2014, a rise of 13% on 2013; evidence of this growth.

 

Considering the impact of the 2008 recession, this shift in consumer behaviour is hardly surprising.  People are more conscious of their expenditure and are less inclined to spend outside of their means. Financing can be beneficial for consumers because the affordable repayment plans that it inherits can enable people to get a better model/spec of car than they might otherwise have been able to afford.

 

 

 

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What different types of Loan Options are available?

 

 

Unsecured Personal Loan

 

Offered by all banks and some dealerships, personal loans are one of the most popular forms of car purchases. A personal loan is an unsecured loan meaning that it isn’t secured against an asset such as a property. Personal loan repayment schemes may be fixed. This can be beneficial because your repayment amount will be the same month-in month-out thus is easier to budget. However, they often have higher rates of interest than other forms of borrowing because there is nothing secured against the loan, thus the risk is higher.

 

 

Hire Purchase (HP)

 

Typically with hire purchase agreements there’s a deposit to pay, (normally 10%) followed by fixed monthly payments. Similarly to personal loans, the fixed repayment scheme can make budgeting easier for consumers with a hire purchased car.  However, because the credit is secured against the car, the car is owned by the HP company until all the payments have been made. The car can be seized if payments are not paid, additionally, until all the payments have been paid, you have no legal right to sell the vehicle.

 

 

Personal contract purchase

 

As with HP, Personal contract purchase, (PCP) requires a deposit, monthly repayments and comes with a fixed rate of interest. The difference between PCP and HP comes when the lending term has finished:

  • In order to retain the car, a final ‘balloon’ payment will be required. This fee is accountable to the car’s ‘guaranteed future value’, (GVF) which is agreed at the start of the contract and based on factors such as anticipated mileage and length of loan.

 

 

  • The cost of returning the car is nothing, unless you fail to return it in a reasonable condition or you exceed an agreed mileage. In both cases an excess would have to be paid.

 

  • If you’re part-exchanging the car then any GFV equity can be deposited towards the next car. However, if the car reaches negative equity you are liable to pay the difference.

 

PCP is an ideal option for consumers wanting lower monthly repayments and those that would like the suppleness of options when the agreement ends. However, PCP tends to come with a contracted mile allowance. Should you exceed this limit; a charge will be added for each mile over the agreed limit. This pence per mile (ppm) figure is representative of the depreciation of the car and the extra maintenance needed to restore it to a level equal to if the car had not exceeded its limit.

 

 

Personal Contract Hire (PCH)

 

 

PCH is when you’re renting a car, normally for two or three years, with a typical limit of 10,000 miles per year of ownership. With PCH there is no option to purchase the car come the end of the hire term; essentially your rental fees are covering the depreciation of your car as you use it. You are also responsible for the upkeep of your car.
In regards to its advantages, the deposit and fixed monthly repayments for PCH tend to be minimal. A car that retains its value is a very good option for PCH because the difference in its new value and three-year-old value will be lesser, meaning you’ll repay a smaller amount. Vice-versa, a car that depreciates in value means that you’ll have to pay more.

 

 

Tips

 

 

At face value, the annual percentage rate (APR) is the easiest way to compare loans and for working out how much your loan would cost you over its lifetime. If the APR is not clear, then ask for it. The flagship rate that’s often advertised can vary as well, depending on your credit-rating.

 

 

It is also worth mentioning that you should always shop around for the best deal when it comes to financing a car. Car finance comparison websites are a particularly useful service for consumers that are looking for the best deal.


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