Purchasing a new car can often cost you thousands of pounds, making it not a feasible option for everyone. In an ideal world, you would save up and pay it off in one go, but another more achievable option is to use a car loan. They are a great way to spread the cost of a car over several months or years, resulting in a more affordable option for buying a new or used car. However, there are risks and costs involved with each one, so it is important to research and compare offers before securing a loan.
What Are The Different Types Of Car Loans?
There are several ways to finance your new car purchase and here are the main ones:
1. Personal Loan
A personal loan could provide you with enough money to buy the car outright. You will then pay the loan back over a set length of time, typically at a fixed interest rate. One advantage of a personal loan is that they tend to be unsecured, so you do not need to secure it against an asset, such as your house, as collateral. However, as there is no security for the lender, you may only be approved for a personal loan if you have a good credit score.
2. Hire Purchase
With a hire purchase agreement, you may need to put down a deposit to drive away with the car. You will then make monthly repayments that add up to the full value of the car and the interest, which means that at the end of the agreed term, you will own the car. The debt is secured against the car, so if you fail to make repayments, the company may take the car off you to recover the money that you still owe them. However, if you can make the repayments, this is a great, affordable option for owning a car.
3. Personal Contract Purchase
PCP loans are one of the newer forms of car loan, but they can be quite complex. With this type of finance, you will not buy the car outright. Instead, you will put down a deposit, then make monthly payments to cover interest and the cost of depreciation. At the end of the term, you have the option to pay a lump sum to buy the car outright, trade it in for a replacement PCP contract, or return it. This makes it a great option for people who like to change their cars regularly, but the interest rates can often be higher than other loans.
If you opt for a car lease, you do not ever own the vehicle, but instead, make regular payments for using it. You will usually be charged based on the value of the car, how long you use it for, and an agreed mileage allowance. You may pay less each month than if you were paying off a car bought on credit, but there may be extra costs involved, such as excessive wear and tear fees.
5. 0% Purchase Credit Card
Using a 0% purchase credit card is an option that is becoming more accepted by car dealers. You will usually need to have a good credit score to get a high limit on a purchase credit card, but it will allow you to have greater flexibility and you can decide how much to pay off each month, as long as you meet the minimum repayment.
There is no one-size-fits-all solution when it comes to car loans, so you should take the time to research all of the available options, and decide which is best for you and your financial situation.