Your car is one of the biggest investments you’re likely to make. It is an essential for many of us, but people often having a hard time saving to pay upfront for a brand new car, tax and insurance all at once. That is why buying a car is one of the most popular reasons people take out loans.
If you’ve considered car finance, you may wonder if buying a car on finance is as simple as happily driving the latest convertible off the dealer’s safe in the knowledge that your wallet hasn’t been completely drained? Isn’t there some sort of catch?
Well, car finance is a simple enough procedure. But, it’s important to have a full understanding of what you are committing to, what the finance deal entails and what the consequences would be should something go wrong.
There are actually three different ways of buying a car on finance; loan, lease or hire purchase. We will explain how to choose the best option to meet your needs. But first, let’s talk about borrowing to buy a car. You need to make sure you can comfortably afford your monthly payment, whatever option you may pick. If it is too much of a stretch, it is likely you will default in repaying for your car, which will result in the car being taken away from you, and a big drop in your credit score, preventing further lending. Make sure you can afford payments even if your financial situation changes.
Personal Loan
This is most popular way to finance a new car. It is fairly straightforward, as it is conducted in pretty much the same way as any other type of loan. You choose the amount you want to borrow and for how long, and you can borrow from your high street bank, building society or independent lender.
You can compare loans fairly easily by checking the APR and interest rates, to assess how much you would pay over the course of a year. It is important to choose your loan carefully, and only borrow what you can afford to pay back.
Advantages:
- No deposit required
- You will own the car outright
- No mileage restrictions
Disadvantages:
- Depending on the lender, if you default on payments they may choose to seize other assets you own.
Hire Purchase
Hire purchase is normally set up through the car dealer. You’ll pay a deposit for your vehicle – usually around 10% – and then monthly instalments until the car is completely paid off. As with any loan, there is interest charged, so make sure that you check the rates before signing on the dotted line.
Advantages
- The credit is against the car, so only the car can be seized if payments are missed.
- Some lenders offer very low rates.
Disadvantages
- Large deposit may be required
- You will not own the vehicle until the last payment is made. By that time, it may be worth a fraction of what you paid for it.
Leasing
Leasing a car is an option offered by many companies, such as All Car Leasing. You pay a deposit and then make monthly payments.
At the end of the agreed leasing period, you will need to either give the car back to the dealer; or keep it for an additional fee. You can also trade it in for a newer model.
Advantages
- Leasing is great if you like changing car regularly and having a new model
- You get a brand new car and don’t even have to tax it
- The maintenance is generally included
- Selling is hassle-free as you just trade the car back it or give it back.
Disadvantages
- May come with restrictions such as a limited mileage allowance.
- You do pay a higher cost for the convenience.
On a related topic, you may enjoy: Can you rent your car to someone else?