In an earlier conversation, we discussed how to budget in the current economic landscape, taking into account some major expenses, like owning a car. Given the low interest rates for both new and second-hand vehicles, financing a car can be a savvy option, and also a chance to bolster your credit history throughout the loan term.
Whether you buy from a dealership or a private individual, you have several finance choices at your disposal, including personal loans, hire purchases, and contract purchases – the three main finance avenues in the UK for buying a car.
Personal Loans:
People frequently choose personal loans to finance cars, particularly when purchasing used vehicles from individual sellers via platforms such as AutoTrader or Gumtree. The process for securing a personal loan mirrors that of other loans, involving supplying personal financial details and income sources, using the loan amount to fully pay for the car.
The loan repayment is made in monthly installments, with interest rates depending on your credit score and loan term. Personal loans are often opted for short terms, like 24 or 36 months.
Most car-related personal loans are unsecured, meaning they lack asset-backed collateral. Consequently, these loans may have higher interest rates as there’s no asset for the bank to reclaim if payments are defaulted on.
A key benefit of this financing form is that you immediately own the car. You can sell the car anytime, even as soon as six months after purchase. The primary downside is the loan’s potentially high interest rates and difficulty of acquisition, especially if you have a poor credit score or need a co-signer.
Hire Purchases:
Hire purchase offers an alternative, traditional method of car financing. Generally, it begins with a deposit, typically around ten percent of the car’s cost, which is often easier and cheaper to secure than personal loans.
With hire purchase, ownership is granted only after the final payment. Hence, selling the car requires consent from the hire purchase dealer, and failure to meet your payment schedule could lead to repossession. This type of financing is only available for cars less than three years old.
Contract Purchases:
In a contract purchase, you start with a deposit of around 20% followed by about three years’ worth of monthly payments, with a lump sum payable at contract’s end. At the onset, you get a Guaranteed Minimum Future Value (GMFV) from the finance company, which is intended as the closing lump sum payment.
You can pay this sum and keep the car, or return it with no further charges. If the car’s value is higher than the GMFV, that amount can also be put down as a deposit for a replacement vehicle. The GMFV is pegged to the estimated mileage during the contract, which, if exceeded, results in deductions or fees.
The contract purchase’s major advantage is typically lower payments compared to personal loans or hire purchases. However, payment of the final lump sum is required to gain ownership, otherwise, you won’t own the vehicle.
