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Thu, 12/03/2020
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Be Wiser's Guide to Buying a Car On Finance

Part of the challenge of finding the right car for you can be deciding how to pay for it. Here we will delve into the details behind buying a car on finance to help you feel better informed about purchasing your next car.


What Is Car Finance?

The aim of car finance is to spread the cost of a new or used car, instead of paying the full amount upfront. 

Most showrooms will offer a range of finance packages to suit your preferences and financial circumstance. These will likely include hire purchase, conditional sale, personal contract purchase, and lease purchase.


How Does It Work?

Each finance package will work differently, but in general, the finance company will buy the car on your behalf and then you will repay this value, with added interest. 

These finance agreements are usually secured against the vehicle for the duration of the contract and during this time your car will be owned by the finance company, not the motor dealer.  At the end of the agreement, which is usually a period of three to four years, when all repayments have been made you will become the legal owner of the car. However, if you are entered into a rental or hire agreement, the car will usually be returned to the finance/hire company.


Does How You Finance Your Car Affect Your Insurance?

Given that when you choose to buy a car on finance, the car isn’t technically yours until you’ve fully paid the car lender off, the way the insurance works is different.

It is likely that you will be financing a car through either hire purchase (HP) or through personal contract purchase (PCP). With both of these options you will need to take out fully comprehensive insurance as the vehicle isn’t yours until the end of the agreement. Furthermore, with a car loan or lease, you will need to take out a fully comprehensive policy, meaning that if you have an accident the insurer will pay out for injury to yourself, damage to the car and any damage or injury to a third party. It may be that if you are leasing the car then the insurance might be included in the package, so it’s advisable to check this.


What Is GAP Insurance?

Guaranteed Asset Protection (GAP) insurance is an optional policy covering the difference between the current value of your car and the amount you owe for leasing or financing a vehicle.

We all know that as soon as you drive a new car off of the forecourt it will have lost some value, let alone after years of usage. So, if damage is incurred on your vehicle whilst paying fully comprehensive insurance, the insurer will only pay for what its current worth is. This means that you would have to pay the difference to the lease company out of your own pocket. 

GAP insurance is designed to make up this shortfall, as you will be covered for the price you paid for the car when it was new. Therefore, it is advisable to consider a GAP insurance policy if you are financially able as your car will inevitably depreciate when driven over several years. 

Does The Type of Car or Loan Have An Effect On Your Insurance?

Both the car and loan type will likely have an effect on your car insurance. 

It is important to note that if you take out a personal loan the car is essentially yours, whereas with car financing options like HP and PCP it isn’t. This means that insurance could be cheaper if you just get the money from your bank or a lender and buy the car outright.

Another important note is that new and used cars may incur different insurance costs. You may expect that new cars will have a higher premium, but this may not actually be the case as new cars often have additional safety features that make your car less of a risk to insurers. 

Alternatively, thieves can be more drawn to used cars as they may lack modern security systems and be easier to steal. Their parts may also be in higher demand, making them easier to sell. This can increase insurance rates. 

The best piece of advice is to shop around and talk to different insurers.


Should You Buy Outright, Finance Or Lease A New Vehicle?

The big question is whether outright cash payment, hire purchase, personal contract plan or any of the other options are the right financing choice for you. To try to make the decision simpler we have laid out some key factors to note about of each choice:


Cash Payment

You own the car outright - Buying your car with cash means you own it straight away, so if you got into financial difficulties you could sell it.

If you’ve bought a car using a finance agreement such as personal contract purchase (PCP), personal contract hire (PCH) or hire purchase, the finance company owns the vehicle during the contract. This means you can’t sell it and if you get behind with your repayments, you might lose your car.

No interest to pay If you are paying upfront, you will not have added interest to pay over a matter of years. For example, using your savings account to make one big payment will end up saving you a lot of money over the years.


Credit Card Payment

Extra Protection - Using a credit card to pay all, or part, of your car’s purchase price will give you extra protection on the full purchase cost as long as you meet your monthly card payments and the vehicle is valued as less than £30,000.

High Interest Rates - Interest rates on credit cards can be higher than other types of finance. A 0% deal is usually best, as you can pay off the loan over several months without having to pay interest. If you haven’t got a 0% deal, pay the balance off straight away to avoid interest.

However, something you must consider is that some dealers might not accept credit cards.


Personal Loan

By choosing to use a personal loan, the amount you pay should work out as less than most other methods and you will own the car from the start of your loan. However, your credit score will determine your ability to take out a personal loan.


Hire Purchase

With this finance plan, you often pay a deposit of around 10%, then you make fixed monthly payments over an agreed period.

Unlike a personal loan, the car isn’t yours until after the final payment. This means that if you miss payments, you could lose the car.

It is worth noting that rates are usually best for new cars, so it is advisable to check what you’ll be paying if you’re buying a used car.

You have certain consumer rights with hire purchase agreements:

  • When you have paid half the cost of the car, you might be able to return it and not have to make any more payments. You would have to check your contract.
  • Once you’ve paid a third of the total amount you owe, your lender can’t repossess your vehicle without a court order.


Personal Contract Plan (PCP)

This is a slightly more complicated method of financing your car. It is similar to hire purchase methods, but you have some different options at the end of the payment contract. You can:

  • Return the car
  • Pay the resale value and keep it
  • Use the resale value towards buying a new car

Some things you need to know:

  • You’ll need to pass a credit check before the PCP is set up.
  •  You need to be sure that you can afford to meet all payments over the whole term of the contract, which could last up to four years.
  • To begin with, you pay a deposit of 10% of the value of the vehicle.
  • There will be charges if you go over your mileage restriction.
  • If you want to keep the car, you’ll need to make a final payment, often called a balloon payment. If you haven’t got this money saved, you may have to take out another loan to pay it off.


Personal Contract Hire (PCH)

A personal contract hire (PCH) plan is a form of car leasing where you never own the car. If you’re not planning to buy the car at the end of a PCP, a PCH might be a cheaper option.

Some things you need to know:

  • You’ll need to pass a credit check before the PCP is set up.
  • You will need to pay a few months’ lease upfront.
  • There will be charges if you go over your mileage restriction.
  •  With a PCH, costs such as servicing and vehicle excise duty (car tax) are included, so you only need to pay for fuel.
  • You never own the car and have to return it at the end of the contract term.
  • If you want to end the contract early, you usually have to pay some charges.
  • When you return the car, it must be in good condition. Normal wear and tear is usually allowed, but this depends on your agreement. Any damage that isn’t covered might mean you have to pay extra charges.


Your Next Steps

The best piece of advice we can offer is that you think about all of your outgoings before you sign any deal and that you’re confident you’ll be able to meet repayments for the full length of the contract you opt for.

Always make sure you thoroughly understand the contract offerings, and base decisions on your financial capabilities.

Having the right insurance for your vehicle based upon your payment methods is important. Be Wiser is a great place to start to help you find the right cover for your needs. Get a quote now.