Cash or Loan: Car Finance Types Explained

Mar 24, 2021 07:16 AM EDT | Staff Reporter

Cash or Loan: Car Finance Types Explained


(Photo : Pixabay)

Buying a car is an expensive undertaking and knowing whether you're using cash or a loan when buying will be important.


This article will explain the different car finance types so you will see which one is the best for you.

There's no doubt that this subject can be confusing since every dealer, car supermarket and car broker appears to be offering a finance scheme to help buy your car.

Car dealer finance

To start, let's look at car dealer finance and the deals available.

Hire purchase (HP)

Hire purchase is a financial product that is secured against the vehicle until the final payment is made.

You DO NOT own the car - instead, the car finance company owns it until the final payment is made.

You will need to pay a deposit, usually 10%, and then pay in instalments plus interest.

Miss payments then your car can be repossessed by the finance company. Also, HP can be more expensive than a bank loan.

Personal contract purchase (PCP)

A personal contract purchase for a car is very similar to a hire purchase deal.

You still pay a deposit and then repay in instalments over an agreed period.

However, the big difference with a personal contract purchase is that there's a lump sum, which is called the 'balloon payment', at the end of the agreed term.

You need to pay this so you will own the car outright, or you have the option of returning the vehicle and starting another PCP.

A PCP agreement is based on the 'Minimum Guaranteed Future Value' (MGFV) of the car.

Again, you need to stick to the mileage agreement and keep the car good in good condition so you won't pay financial penalties.

Personal leasing (contract hire)

A personal leasing deal is very similar to a PCP deal.

There are low monthly payments to be made but there's no option of buying the car when the agreement ends.

When you sign up, you agree on the mileage limit and contract length which determines the leasing price.

There's also an initial rental charge levied which is around three months of the agreed fee in advance.

According to Money Saving Expert, you will need to stick to the agreed mileage or face financial penalties and some deals include servicing, otherwise, you'll need to pay to maintain the car.

0% finance

You will occasionally see a car dealership offering 0% finance and these deals can be more affordable because there's no interest to pay on the borrowed amount.

However, you will need to pay a deposit, it can be 35% or even more, and it is unlikely you will be able to negotiate a discount.

Miss a payment and the finance company will move you to a higher interest rate scheme.

Other types of car finance

  • A personal loan: You could borrow the money from a bank or finance company. You'll need to pay a deposit and you will own the car. This loan may also be cheaper than a dealership's finance scheme.
  • Credit card: You could use a credit card for buying a car, but it will need enough credit limit available. Credit cards tend to have a high APR so this may be an expensive way of buying.

Buying a car with cash

There are benefits to buying a car with cash, and these include:

  • You will not need to borrow money
  • You will not pay interest on the amount borrowed
  • You will own the car outright
  • You will be able to negotiate discounts and extras with cash.

Other financial issues to consider

It's also worth noting whether you are using cash or a car loan, or buying from a car dealership or a private seller, that there's an important tip to bear in mind.

And that's when buying a used car, it is worth carrying out a full vehicle history check from Instant Reg Check. This will reveal:

  • Who the registered keeper is
  • Check whether it has been stolen
  • Whether the plates have been changed
  • Check for any outstanding finance
  • Whether it has previously been written off
  • Check the MOT history.

Of these checks when buying a used car, checking for any outstanding finance is important since the car finance company will own the car and the seller cannot sell it.

It's a small amount to pay to bring peace of mind and help avoid making what could be a very expensive mistake.

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