All Types Of Motor Finance Explained

Jun 10, 2021 09:05 AM EDT | Staff Reporter

All Types Of Motor Finance Explained

(Photo : Unsplash)

Buying a car is one of life's most significant purchases. From deciding whether you want the next family SUV or the sleekest coupe to paying upfront or financing, there are many factors to consider. Getting it right is your biggest challenge. 

Shopping around may be all part of the fun, but taking the time to consider affordability, safety and practicality are all part of the process. Once you have your budget in mind, you need to decide how you would like to finance your car. 

Want to know more? Here's our round-up of all the most popular types of motor finance:

Paying with cash

When you mention the word finance, most people assume that you have to strike up a deal with a lender or the bank to get you the funds for your next car. But that is only part of the story. 

Paying for a vehicle with cash upfront comes with zero ties to third parties and makes the car yours outright. That way, if you need to sell it later down the line, you can do so without getting anyone else involved in the process. 

Unlike a personal loan, you are entirely dependent on what you have in the bank already. Cash buys come with fewer perks like warranty and servicing, but it is the simplest way to still buy a car. 

If you haven't got enough funds to cover the entire cost of the car you want, some used car sales specialists will let you pay a big lump sum deposit and pay the rest back in monthly instalments.

Personal Loan 

One of the most common finance options is a personal loan or an unsecured loan. Available from reputable lenders, building societies and banks, you can spread the cost of your new car into low monthly instalments. 

Perfect for those who need a new car but can't afford the upfront costs on their own, this type of finance will give you the best access to a wide range of vehicles on the market. 

You are expected to put down a lump sum deposit, and then the rest is paid off in affordable repayments. The loan isn't fixed against the vehicle itself, so you have the freedom to sell the car while making your repayments if needed. 

With fixed monthly repayments, budgeting becomes a doddle. What's more, you can use the loan to buy either privately or from a dealership.

Personal Contract Purchase (PCP)

Perfect for those that like to switch up their vehicles every few years, a personal contract purchase is one of the most flexible options around. You can:

  • Pay the resale value and keep the vehicle
  • Return to the dealership
  • Invest the resale value towards buying a new car

After putting down a lump deposit on your chosen vehicle, the rest of your loan is paid off in fixed, monthly instalments. You cannot sell the car during that time, and you must stick to your agreed terms, such as mileage and maintenance. So make sure you read all your terms and conditions before signing on the dotted line. 

If you are getting towards the end of your contract, you can opt to pay a final lump sum during your last few months. It's worth bearing in mind that the vehicle isn't entirely yours until your loan is paid off.

Personal Contract Hire (PCH)

Like the title suggests, personal contract hire is simply that - hiring. Unlike PCP, there isn't an option to ever own the car when your contract expires, which is excellent for those who don't wish to tie themselves to a particular vehicle. 

Typically you will need to pay at least three months lease upfront after passing a credit check. Before agreeing to a contract, make sure you can afford the repayments and that your outgoings can support you throughout the length of your contract. Then all you have to do is choose your car, stick to your agreed terms and conditions, and avoid any damages. 

When your contract ends, simply return the car. 

Hire Purchase (HP)

Limitations are few and far between when it comes to a hire purchase contract. It's perfect for those who love the whole driving experience, as you have more flexibility to upgrade your car within the parameters of your agreement. 

You have zero concerns about ownership and only need to focus on staying to your agreed mileage and keeping the vehicle in good condition. Like PCH, you are required to pay an advance three months lump sum rental deposit, and you often get servicing and other perks thrown in for free. 

Bad Credit Car Finance

For some of you, the idea of being even accepted for finance seems impossible. You may have no credit history to speak of, are self-employed or have incurred a few defaults along the way. Whether you've missed a mortgage repayment or have been caught out by the fine print in your terms and conditions, bad credit is often born out of simple mistakes. 

Fortunately, the financing industry has realised that some customers simply need a helping hand to rebuild their credit score and have made tailored bad credit car finance available from a series of reputable lenders. 

Bad credit finance comes with one catch, and that is that your loan repayments will have a more significant interest attached than someone with a good credit score. So before you agree to anything, make sure you go over your budget with a fine tooth comb. Make sure that you have enough income to cover your expected monthly repayments. 

The payoff is that you get access to all the best vehicles on the market, and you can rebuild your confidence and credit score at the same time. You may need a guarantor in place and need to provide some personal information to secure a loan, but the payoff is worth it. 

Jumping on the motor finance bandwagon not only gives you a wider choice but it gives you more control of your spending habits. What doors will finance open for you?

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