Car finance schemes can be a major source of profit for businesses, due to the APR added – so almost every dealer, car broker or car supermarket offers a variety of finance options for consumers.
Thanks to low-interest deals and a growing credit industry, finance deals can be a great way to get a better quality used car in a more affordable manner.
However, there are a few key things to be aware of before committing to any deals…
Hire purchase (HP)
This is perhaps the simplest type of car finance plan. After paying a deposit of around 10 percent of the car’s value, you hire your car with the option to buy it by the end of a 12-60-month contract. Hire purchase is arranged by the car dealer, but brokers also offer this service. The rates are often very competitive for new cars, but less so for used cars due to a higher rate of APR.
This option is often best for those with a good credit rating, as this means you’ll get hire purchase deals at the lowest interest rates.
Drawbacks include potential repossession if you miss a payment and it can sometimes be more expensive than an independent bank loan.
Personal contract purchase (PCP)
Based on a ‘minimum guaranteed future value’ for the car, this involves paying a deposit, then low monthly instalments over a fixed period. At the end, you can either pay a lump sum to purchase the car outright or return the vehicle.
It’s important to stick to agreed mileage limits to avoid costly penalties of up to 30p per mile – so if you are doing a lot of miles, this option may not be for you.
PCP financing on used cars rarely offers the same incentives as new cars as they are not as lucrative for manufacturers. However, it’s worth keeping an eye out for used-car sales events as some may offer the option of a deposit contribution.
You may consider a personal loan if you have a strong credit rating, as this could work out cheaper in the long term than a finance scheme. There may be a higher APR, but this could be offset by lack of deposit and spreading the loan over a period of your choice. You will also own the car from the outset.
Check the APR between the different payment plans you’re offered and compare it to the rate charged on a personal loan to see what would be the best overall value.
Check the small print
Whichever method you choose, you’ll need to be certain you can afford the repayments throughout the agreement, even if your circumstances change. While some deals give the option of ending the contract early, there can be significant fees for doing so.
You could also buy a used car that has outstanding finance on it, without realising. If it does, the finance company that paid for it will have a vested interest and could reclaim the money or the vehicle from you.
For this reason, it’s advisable to get an HPI check on any used vehicle before you buy it. This is a check of the vehicle’s history that will uncover any outstanding finance on it, protecting you against this potential pitfall.
If you’re buying a used car on finance it’s worth investing in GAP insurance. This covers the ‘gap’ between the current market value of your car and the value of your outstanding loan or the cost of replacing your car, should it get stolen or written off. However, it is worth bearing in mind that some providers, such as Warranty Direct, are unable to accept leased vehicles on GAP insurance.