We have previously written a piece on budgeting in today’s financial climate. There are certain big expenses we must pay. We have to get around, and that normally means a car. Finance rates today are low for both new cars and pre-owned vehicles, so financing a vehicle is not a bad idea, especially if you want to build up your credit rating during the course of the loan.
Whether you purchase a car through a dealer or from a private seller, you can choose from one of a number of viable financing options. Personal loans, hire purchases and contract purchases are three primary ways buyers can finance a car in the UK.
Buyers often use personal loan to pay for a car if they are purchasing second hand cars from private individuals off autotrader or a site like Gumtree. Applying for a personal loan entails the same steps one uses for securing any other type of loan (providing personal financial details and income sources) and using the proceeds of the loan amount to pay for the car in full.
In turn, you pay the bank back for the loan in monthly installments with the interest rate contingent on your credit rating and the term of the loan. Personal loans are frequently taken out for shorter terms, or 24 or 36 months.
Most personal loans for cars are on an unsecured basis. That means they don’t have a means of collateral attached to them as a safeguard for default. However, the rates for such loans are often higher because the bank is unable to seize an asset if you fall behind on your payments.
One major advantage of utilizing this type of financing is that you will own your car outright. If you want to sell the car after a period of, say, six months, you can easily do so. The only disadvantage that is connected to the loan is that it can be difficult to obtain. Again, rates can be higher and, if your credit score is not all that good, you may need to retain a co-signer.
You can also finance a car by means of hire purchase, which is often thought of as the traditional way of financing a car. Typically, you will put a deposit down that is about ten percent of the car’s purchase price. This kind of financing is much easier to secure than a personal loan and normally is more affordable.
However, you do not own the car until you make the final payment. Therefore, you cannot sell the car without obtaining permission from the hire purchase dealer. Plus, you risk the chance of repossession if you don’t regularly make your payments.
This kind of financing is only offered for vehicles that are under three years of age.
Vehicles may be financed through contract purchase as well. The process entails putting down a deposit of approximately 20% and making approximately 3 years’ worth of monthly payments. A lump sum is usually paid at the end of the contract.
At the beginning of the contract, a Guaranteed Minimum Future Value or GMFV is provided by the finance company. This amount serves as the final lump sum payment. The contract buyer can pay this sum and keep the vehicle or return the vehicle and pay nothing more. If the vehicle is appraised at a value that is above the GMFV, then that figure can also be put down for a deposit for a new vehicle as well.
The GMFV is based on the estimated mileage that a driver believes he will be driving during the course of the contract. If the estimate is above the GMFV, the mileage amount will be subtracted from the guaranteed amount or a fee will be assessed for the extra mileage.
The main advantage of this kind of agreement is that car payments are typically much lower than they are for personal loans or hire purchases. However, you do not own the vehicle and, if you cannot pay the final lump sum, you still will not own the car.