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For most people, after the house, the car is probably the biggest financial outlay they will make. So, what car financing options are available ?
There are many different ways to fund the purchase including the old fashioned but rather sensible idea of saving the money instead of borrowing it. If you do not have cash available you could:
1) Take out a personal loan: Some banks will insist you take out a car loan but ultimately the details are the same. The loan is set up on a capital repayment basis, meaning that you pay back the amount you borrowed over a set period of time. Although your monthly payments are fixed over the term of the loan, in the early years you will be paying back mainly interest. It is only in the latter years of the loan that you start repaying larger amounts of capital. This doesn’t mean anything unless you pay the loan off early. If you repay the total amount you borrowed in the early years of the loan you may receive a refund of some of the interest that you would have paid. If you pay in the later years you won’t be entitled to a large refund as the interest has largely been repaid.
The advantages:
- Interest rates are currently low, so you should be able to get quite a good deal
- Your payments are fixed over the term of the loan
- If you shop around you should find a flexible deal that allows you to make overpayments as and when you can afford them without imposing a penalty. Even small overpayments can lower the total amount you repay quite significantly.
- You own the car from day one unlike when you buy via hire purchase. This means that you have the flexibility of being able to sell the car to repay the debt. This is your decision. The lender cannot repossess the car should you stop making payments although there are other legal alternatives available to allow them recoup their cash.
Disadvantages:
- You have to have an excellent credit rating to get a great personal loan rate these days.
- You will generally pay more for the car over a longer time period than you would have done had you paid in cash.
2) Hire Purchase: This is effectively a loan although as it is secured against the car, you may find it easier to be approved for hire purchase than a personal loan if your credit rating isn’t too good. You usually have to pay a fairly large deposit and you could find that if you sell the car before the Hire Purchase is cleared you will still owe a fairly large amount of money.
3) Personal Contract Purchase – this is a newer form of Hire Purchase and one that allows more people to buy a new car as the repayments are usually lower than those available under a loan or Hire Purchase agreement. The reason is that you pay a balloon payment at the end of the contract if you want to finally own the car. Until this payment is made you are effectively leasing the car as the finance company still owns it. At the end of the term you can buy the car, give it back or trade it in for a similar arrangement. There may be tax advantages for self employed people using a Personal Contract Purchase agreement but it is best to talk to your Accountant or Tax Adviser for more information.