Running a car in the UK can be an expensive thing, especially in the current financial landscape. The cost of fuel is set to breach £2 per litre, and insurance costs are not getting any cheaper. But sometimes an upgrade is necessary, whether to improve reliability and fuel economy or to meet new household needs. Thankfully, there are ways to mitigate the short-term financial impact of buying a new car – financing chief among them.

How Does Car Finance Work?

In essence, car financing is the borrowing of money from a lender to facilitate the purchase of a motor vehicle. There are numerous different kinds of car finance, each of which have their own specifics, benefits, and drawbacks. These different forms of finance can suit different situations as a result, whether with regard to the terms of repayment or the amount to be repaid. Car finance solutions are generally distinct from taking out a loan to pay for a car, in some key ways which will be outlined below.

What are the Different Types of Car Finance?

There are three principal types of car finance: hire purchase, personal contract purchase, and personal lease. Hire purchase and personal contract purchase agreements are common in used car dealerships, while personal leases are much more commonly found relating to newer vehicles in showrooms.

Hire purchases are the simplest form of car finance. The car remains the property of the dealership, and you ‘hire’ it with monthly repayments plus interest. Once the total value of the vehicle plus interest is paid, usually over a pre-arranged payment period, the car is yours.

Personal contract purchases, or PCPs, are a similar set-up but with a key difference. Part-way through your repayment plan, you are given the option to make a ‘balloon payment’ to buy the car outright or to trade the car in for a new PCP plan with a newer vehicle.

Lastly, personal leases share much in common with PCP plans – the key difference being that you are not buying the car. Rather, you are renting the vehicle long-term, with a regular payment schedule. Leasing often includes servicing costs, bringing down the overall running costs associated with using a car.

It is also worth mentioning that certain dealerships may offer a 0% finance deal, particularly with vehicles they are seeking to sell quickly to make room for newer models. These kinds of finance see interest rates eschewed completely, though this can weaken further negotiation and be taken away entirely if the payment schedule isn’t honoured.

Cash, or Part-Exchange?

If you are already in ownership of a vehicle, this can present you with another choice: to buy a new car outright, or to part-exchange your old car to the dealership and subsidise the cost. Part-exchanging can be a worthwhile way to reduce costs, but depends on the age and quality of your vehicle; plus, you may be able to get a better price selling privately. Buying in cash can be simpler, but also tougher. Ultimately, it falls to you to decide what works best in your situation.

 





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Clarence Choe