Ready for a new car but intimidated by the prospect of figuring out how to pay for it? Car finance can be a confusing world if you haven’t got a translator on standby – but without the funds for the car of your dreams, or the financing options to cover it, you could be letting a language gap get between you and your next car.
So if you need some help decoding car finance terminology so you can get to the important stuff, never fear – we’ve got the lowdown. Committing to a new car is a massive decision and we don’t want car finance to be the reason you’re hitting a brick wall with your purchase.
The Breakdown
There are many types of car finance available, but the most popular financing option is ‘PCP’ (Personal Contract Purchase) car finance. PCP car finance is infinitely less complicated than it sounds and it shares similarities with the Hire Purchase method, where you pay monthly instalments until the car’s value is fully paid off. PCP is instead calculated in proportion to the car’s depreciation, meaning you pay off this depreciation in monthly instalments. If the car maintains its value, it means you pay less – which is always a huge bonus! For the best car finance deals, check out our detailed guide or read more about PCP and Hire Purchase deals below.
Hire Purchase Agreement
A Hire Purchase agreement is one of the best options if you’re intent on owning a car after your loan period has ended. By putting down an initial upfront deposit, and committing to a series of manageable monthly repayments – you’ll end up officially owning your vehicle at the end of the term. With Hire Purchase, you can drive away with a car that will eventually become yours; and you won’t be limited to any mileage agreements either. Your interest rate will be subject to the personal APR that you’re offered, so credit history does come into the equation – but a wide range of lenders specialise in offering HP loans for those who have a less than perfect credit score.
Personal Contract Purchase
PCP deals also involve an initial down payment and regular monthly instalments, but they differ from Hire Purchase in that you don’t pay off the total value, but the car’s depreciation instead. Lenders predict the Guaranteed Future Value (GFV) of the vehicle, so you end up paying off the difference between the current and future value. PCP car finance is a great option for those with a good or excellent credit rating as the scheme usually provides the lowest possible repayments. With a Personal Contract Purchase, you should always bear in mind that to own the car outright at the end of the term you’ll have to make a final balloon payment – and you’ll need to stick to an agreed annual mileage estimate throughout the contract.
The Deposit
Like with the Hire Purchase system, you’ll need to place a deposit on your nice new car – but with PCP car finance, there’s a cap on the size of your deposit. This is usually no more than 30% of the car’s total price, but you can also trade in your current car and use that as the deposit instead. No sweat.
The Contract
At the end of a PCP contract, the ‘Guaranteed Minimum Future Value’ (GMFV) comes into play – and this is where you pay the final value outstanding. This value is decided by assessing the car’s type, mileage and the length of the PCP contract. It is commonly known as the ‘balloon payment’, and this all depends on whether you keep the car or change it. If you decide to keep the car, you pay the entire value of what it’s now worth at the end of your PCP agreement – which is typically 3 years long. If you decide to return the car, there’s no balance outstanding and you can just walk away – it’s as simple as that (talk about driving a hard bargain!). This is because the value of the car should be equal to the balloon payment outstanding.
Guaranteed car finance
To guarantee car finance to everyone before they’ve applied would be unethical and illegal, so it’s pretty unlikely that you’ll find absolutely guaranteed car finance deals. Saying that, even buyers with a poor or less than perfect credit history can still access car finance. Brokers, such as The Car Loan Warehouse, work closely with lenders who can offer loans to those with bad credit scores – so whatever your credit situation is, there’ll more than likely be a car finance deal available for you.
Bad credit car finance
Credit ratings go hand in hand with the personal APR that a lender will offer you; not to mention that the better your credit score is, the more likely you are to be approved for car finance. For those with a less than perfect credit history, this can make the world of car finance seem completely inaccessible. In actual fact, a bad credit report doesn’t need to put you off applying for car finance: bad credit holders just need to be able to afford the repayments in order to be considered for a loan. Taking out a car loan and repaying it in full and on time can even improve a credit rating, so it can actually be a great way to rebuild a damaged report.
0% car finance
Interest free car finance deals can seem like an offer that’s too good to be true – and unfortunately that’s because, more often than not, they are. With 0% car finance deals you won’t have to pay any interest whatsoever as there is no APR, however, manufacturers build the cost into the price of the new vehicle. Interest free car finance is usually offered on older models at the end of their production cycle and will more than likely include a pretty hefty initial deposit – between 30 and 50% of the vehicle’s value. So whilst you may drive off believing you’ve got a great deal, taking out interest free car finance can often mean splashing out more money on a less competitively priced vehicle.
If car finance queries were the only thing standing between you and an upgrade, now’s the time to find yourself some car finance with The Car Loan Warehouse. We deliver our customers low APR rates and offer a range of practical financial advice to guarantee you’re getting the best possible deal. Check out our quick and easy online car loan calculator for an instant quote today.
