What is the best way to finance a car?

What is the best way to finance a car?

The new registration plates have recently launched, which means now is a popular time to find a new car. Financing a car can be confusing; there are so many options that you can choose. We’ve broken down the various options with some of their advantages and disadvantages, so that you can make an informed decision about how to finance your next car.

Unsecured personal loan

An unsecured personal loan is a way of financing your car. At Freedom Finance, you can borrow from £1,000 to £25,000 and choose your payment term from one to five years. If you’re a homeowner you may also be eligible to borrow over £25,000. Checking your eligibility for a car loan with Freedom is easy and doesn’t impact your credit score.

Advantages

  • If you have a good credit rating you may only have to pay back a small amount of interest.
  • You own the car, so if you want to sell it for any reason, you can do. You just need to make sure you still pay back the loan.
  • The repayments are typically fixed each month which makes budgeting much easier.
  • You may be able to negotiate a cheaper price for the car you’re looking to purchase as you can pay for the car in cash.

Disadvantages

  • As the car will be owned by you, you don’t have the option to trade it back in for a different car once you have paid off the full loan.
  • Your credit rating will be negatively affected if you do not keep up your repayments.

If you have a poor credit rating and have difficulty securing a loan yourself, you could consider a guarantor loan. A guarantor loan is a type of unsecured loan, which requires you to have someone else willing to make the loan repayments, should you fail to do so. Your guarantor can be anyone who trusts you and you are not financially linked with. For example; a friend, family member, colleague, neighbours or landlord.

Hire Purchase (HP)

With a Hire Purchase agreement, you are typically required to pay a deposit and then pay the rest of the cost via monthly instalments. You don’t own the car until all repayments are made. Generally, you repay the cost over a period of one to five years.

Advantages

  • When you have paid all the monthly instalments and any ‘option to purchase’ fees, you will own the car.
  • Payment terms are usually flexible.

Disadvantages

  • Unlike a personal loan, you won’t own the car until all repayments are made. This means that you can’t sell the car until you everything is paid off.  
  • You must keep up to repayments as the dealership can repossess your car if you miss a payment.
  • Your credit rating will be negatively affected if you do not keep up your repayments. 

Personal Contract Hire (PCH)

Personal Contract Hire (also known as leasing) is a long-term car rental. As part of the contract, you pay an initial rental followed by fixed monthly payments, but you never own the car yourself. After the lease period, you can return the car or take out a new lease.

Advantages

  • It’s good for people who want to change cars regularly. If you often get bored of your car, with a Personal Contract Hire you can return your current car after the lease period and take out a new lease.
  • You will usually have options such as initial rental term, lease term and mileage which you can select to make the right package and monthly payments for you.

Disadvantages

  • If you go over your agreed mileage you will need to pay a fee.
  • You will never own the vehicle and you won’t have an option to buy the car when the contract ends.
  • Your credit rating will be negatively affected if you do not keep up your repayments.

Personal Contract Purchase (PCP)

Personal Contract Purchase is great if you want a few options available to you at the end of your contact. It is a finance agreement for a car where you make an initial payment, followed by fixed monthly repayments. The guaranteed minimum future value (GMFV) is deferred to the end of the contact. At the end of the contract you have the choice to hand the car back, make a final balloon payment (the GMFV plus any fees) and the car will be yours to own or sell, or you can refinance the balloon payment.

Advantages

  • It’s good for people who want options available to them at the end of the contract.
  • You will usually have options such as initial rental term, lease term and mileage which you can select to make the right package and monthly payments for you.
  • You will usually have the option to end the contract early once you have made over 50% of the repayments, so it can be good if you are looking to switch your car.

Disadvantages

  • If you go over your agreed mileage you will need to pay a fee.
  • If at the end of the contract the car is worth less than the GMFV, you will have negative equity if you choose to sell the car.
  • Your credit rating will be negatively affected if you do not keep up your repayments.

Own savings

Your own savings are likely to be the most cost effective way of financing a car. However, it can sometimes be quite difficult to save enough money for the car you want.

Advantages

  • Buying a car with your own savings means you will own the car outright from the day you purchase it. This means that you can sell the car at any point without any issues.
  • You will not need to pay any interest and you won’t be tied into a finance agreement.
  • If you pay for part of the car using a credit card, you are protected under credit card purchase protection.

Disadvantages

  • You need to be careful not to use all of your savings in case you need to pay any repair costs or other significant purchases.
  • Unlike leasing, you have to consider the depreciation of the car.

To check your eligibility for a loan for your next car visit Freedom Car Finance, you’ll receive a decision in minutes without an impact on your credit score.

The above post does not constitute as financial advice and is intended to be informative.

 

 

Need guides to borrowing?

Our aim at Freedom Finance is to provide you with the information you need to make educated decisions when it comes to your borrowing and your money. The online financial market place is filled with conflicting, jargon-filled information about which loan product is the right one for you.

These deals may look attractive, but many of them apply only to those with an outstanding credit history. In reality, the best deal on offer might not be available to you. With our comprehensive finance guides, we aim to equip you with the know-how to make the best decisions about your borrowing and your money.

Check out our helpful guides:

See what our customers are saying

Whether you're planning on some home improvements, replacing your car or simply getting your finances in order, a loan from Freedom Finance could be more affordable than you think. Use our calculator above to find the ideal loan for you. All quotations given are for illustrative purposes only. Credit subject to status. The rate you are offered will depend on your personal circumstances, credit assessment procedures and other related factors.