More and more at Pocket Rocket we are seeing that our customers are not educated with the different finance options available to them for purchasing a car. I wanted to put this short blog together with the aim to provide the customer with a better understanding of what is available in the market place for car finance.
A huge milestone for Pocket Rocket was when the business was awarded accreditation and approval to provide credit-related regulated activities by the Financial Conduct Authority – you can find more details HERE
A generation ago, a private car buyer with, say, £8,000 cash to spend would usually have bought a car up to the value of £8,000. Today, that same £8,000 is more likely to be used as a deposit on a car which could be worth many tens of thousands, followed by up to five years of monthly payments.
The different finance options for buying a car
Purchasing your own car is an expensive endeavour. In fact, second only to buying a house, it may be the most expensive purchase you’ll ever make. Owning a car signals freedom and you can travel on your own time, getting from A to B your own way. However, before you get swept up in the romance of the wind blowing through your hair as you speed down the motorway, it is important to consider the different finance options for buying a car. Here is a comprehensive overview of the different options, with a discussion of the advantages and disadvantages.
Cash Vs Savings
With interest rates at an all-time low, it is possible that your savings have not produced the returns you had hoped for. Therefore, rather than leaving your savings to slowly devalue and borrowing the capital for purchasing a car, which will only result in a high rate of interest, you might want to consider using your savings to fund part or the entire cost of a car. However, this should only be an option for you if there will still be emergency funds left in your savings once the car has been bought. If you don’t have enough savings to cover the full cost of a car, using part of your savings can help you secure the largest deposit possible.
Even if you do decide to use your savings to buy a car, it might be a better idea to use your credit card and pay the full amount off the following month. This is advisable, as you will be eligible for protection offered on credit card purchases. If you use your credit card to purchase something between £100 and £30,000, you are automatically covered by “Section 75” of the Consumer Credit Act. This means that in some cases, you may be able to get your money back from your credit card company if there is a problem with your purchase or the company you’ve purchased from.
Personal loans are offered by banks and building societies to those with good credit ratings. For example, if you are a homeowner, many banks offer home equity lines of credit that can be used to purchase vehicles.
The advantages of a personal loan are that it is easy to set up and can cover the entire cost of the car or only part of it; the choice is yours. You can find a competitive fixed interest rate if you shop around. The disadvantage of a personal loan is that you may have to wait for the funds from your personal loan to appear. Consequently, other borrowing from your bank or building society may be affected.
Hire Purchase (HP)
Hire purchase is an agreement between you and the car dealer where you agree to finance the car through instalments, usually spread over 12-60 months. Often you’ll have to put down a deposit of 10%. The HP loan is set against the car, so you won’t fully own the car until the very last instalment has been paid. This form of financing is often competitive for new cars.
The advantages of hire purchase agreements are that they are quick and easy to arrange and the repayment terms are flexible, ranging from 12 to 60 months. The deposit is usually low, at 10%.
The disadvantage of a hire purchase is that you won’t actually own the car until your final payment. Over time the HP plan may work out to be more expensive in comparison to shorter-term agreements.
Personal Contract Plan
A personal contract plan is a type of hire purchase which normally involves a lower monthly instalment. With such a plan, you pay the difference between its sale price and its price for resale back to the dealer. Therefore, you don’t actually pay for the car upfront. This price is determined through an estimation of the yearly mileage. Personal contract plans have shorter terms than the HP plan, as they range from 12 to 36 months.
The advantage of the personal contract plan is a lower monthly payment and deposit. As with the hire purchase the repayment terms are flexible. The obvious disadvantage is that the car’s mileage and overall condition will affect the cost. You could find that you’ve paid more over time in comparison to the HP plan.
Feel free to request an illustrative finance quote on any of our stock cars. This can be done online by simply clicking enquire on the car of choice and by providing some basic details as defined below:
- Finance Product – HP or PCP
- Term (duration of agreement 1-5yrs)
- Part exchange details (where required) registration number and mileage