What are the different types of vehicle finance?

It is one of the most common reasons for taking on credit, but do you understand what kind of car loan you have? 

 
The car industry is one aspect of the UK market which is booming. Figures released by the Finance & Leasing Association (FLA) show that the point-of-sale (POS) consumer new car finance market saw new business up BY 19% by value and 13% by volume in Q1 overall in comparison to last year. 
 
However it is clear that there is still some bad practice around, as our advisers find that far too many people do not know what kind of finance they have. 
 
When preparing the financial statement (the document used to help people deal with their creditors or decide on a debt solution) many people only know that their vehicle was bought on finance or that they got it from a garage. Neither of these things define whether the loan is secured against the vehicle or not. Nor does it tell you who owns the car. Is it yourself, the garage or the finance company?
 
Before taking out a loan to buy a new car or going to a dealership for finance, you should thoroughly understand the terms of your loan. You should know whether the vehicle can be repossessed if you miss payments, what are the rates, the risks and the termination rights? If you can’t answer these questions, it’s time to read the terms of your agreement or to phone the company.
 
There are three types of car finance;
 
  • Personal Contract Purchase (PCP)- Around three-quarters of UK new car sales financed with this type of finance, according to the Finance and Leasing Association. You pay a deposit and make monthly payments, however you don’t own the car at the end of the fixed period. The more deposit you put down, the more you can reduce the portion of the car price you’re charged interest on. At the end of the agreement, you can choose to make a large final ‘balloon/boomerang payment’ to own it, hand back the car to the dealer, or use the car as a deposit towards another car with the same dealer. 
  • Hire Purchase Agreement- This is where you put down a deposit as with PCP, but you then spread the entire cost of the car over the loan and own it outright at the end.
  • A personal loan (not from the dealership) for the full sale price of the car. This is often over a longer period and the interest rates are usually lower. Technically, you own the car from day one with this option. 
 
It is best to think about what will suit your individual circumstances and budget before you go to a garage. You will be advised by a car salesman who will earn commission on both the sale of the car and the finance agreement. Any kind of car finance will be a big outgoing and a brand new car will depreciate considerably, so factor that into your decision-making. 
 

If you’re struggling to meet all your credit payments, please call our advisers on 0800 043 40 50.