4 Types of Car Finance Agreements

Buying a new car can be very exciting, but it’s very important to be realistic about what you can afford. Car finance is the process of paying for a vehicle over a set period, instead of buying it outright with a cash payment. This is a good option for individuals that don’t have the money at hand to buy the vehicle they want. In this article we will explain the four types of car finance Manchester agreements.

Hire Purchase (HP)

A hire purchase agreement is when you hire a car from a lender until you’ve paid the amount in full. Meaning that you will not fully own the car until the final payment has been made. Hire purchase is one of the most common forms of car finance.

Advantages:

• The payments are fixed over the entire period, so you won’t have to worry about your monthly payment going up.
• There are no restrictions on mileage imposed.
• You’re able to hand the car back if you need to.

Disadvantages:

• In comparison with other finance options, the monthly payments are usually higher than for hire purchase agreements.
• If you miss monthly payments, it could impact your credit score negatively.
• If you miss your monthly repayments, the vehicle can be repossessed.

Guarantor Loans

A guarantor loan involves a third party (relative, friend etc.) acting as a guarantor. The guarantor will pay back the money on your behalf if you fail to keep up with the payments. This is a popular choice for those with a poor credit score.

Advantages:

• A good choice for those who have difficulty getting an approval for finance.
• They can help rebuild your credit score.
• The payments are fixed over the entire period.

Disadvantages:

• Usually, a higher APR.
• The guarantor usually needs to be a homeowner, so it limits your options.
• You need to have someone willing to act as your guarantor.

Personal Contract Purchase (PCP)

A PCP agreement is like a hire purchase agreement. You have the option to pay a deposit and pay monthly repayments over a set period (usually 24 to 48 months). At the end of the fixed term, you have the option to either:

• Hand the car back
• Use the equity as a deposit for your next vehicle
• Obtain ownership of the vehicle by paying the Guaranteed Minimum Future Value (GMFV) (“balloon payment”).

Advantages:

• Gives you the option to either keep the car or give it back
• The payments are fixed over the entire period.
• The monthly payments tend to be lower than other agreements.

Disadvantages:

• If the car is returned in a different condition (for example excess mileage or vehicle damage), there will be charges.
• Interest on the GMFV is included in the monthly payments.
• If you want to keep the car, you will need to pay the GMFV.

Personal Loans

Personal loans allow you to borrow an amount of money over a fixed period. Choosing to take out a personal loan means you will own the car as soon as the dealer receives the money for it.

Advantages:

• The car can not be repossessed because this type of loan is not secured against the car.
• You can sell it at any time during the agreement
• You can buy from a private seller as well as a dealer.
• Payments are fixed for the whole loan term

Disadvantages:

• The maximum loan values do not usually exceed £25,000.
• You’re less likely to be accepted if you have a poor credit score.

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