Car Loans – All You Need To Know

Buying a car seems to be getting more and more complicated. It used to be that you simply needed to ask your bank for a loan. But, now you have to know your PCPs from the HPs. Here’s a simple guide to help you get started.

There are three kinds of loan to help you buy a car: the traditional unsecured personal loan, the Hire Purchase Loan (HPs), and Personal Contract Purchase Loans (PCPs).

The Traditional Loan

Quite simply, you borrow the amount you need and pay it back with interest. The more money you take out, the lower the interest rate will be. Small loans of £5000 or less could be as high as 10%, but, with a good credit score, and a larger loan amount, you could get that down to 3.5% or less. However, be aware that most quoted APRs are ‘representative’ – this means that only 51% of people get that rate, and 49% could get a higher rate.

Make sure you understand any hidden fees in your loan as well, such as fees for delivery of your loan and fees to repay early.

So:

  • A car that costs: £20,000
  • Deposit: £2,000
  • Loan: £18,000 over 3 years at 3.5% APR
  • Repayments: £527.00 a month
  • Total Paid: £18,971.99 + £2,000 deposit = £20,971.99

Hire Purchase Loans

HP loans are easier to get than normal loans, so they are ideal for people with bad credit. However, the interest rates are generally higher, which would result in large monthly payments.

Essentially, the HP loans allow for you to rent the car with monthly payments, until you have fully paid off the amount, after which you pay an ‘option to purchase fee’ of £100-200, and the car is yours.

Interest Rates are usually between 4-8%, but could be higher, and, as your car is owned by the creditor, your car can be repossessed if you do not pay.

If you have a very large deposit available, it may be possible to get 0% finance. This means having minimal monthly payments. However, this is rare and difficult to do, and you will need fantastic credit. 0% Finance Deals are often used to draw in people who do not qualify, in order to offer them something else later on.

So:

  • A car that costs: £20,000
  • Deposit: £2,000
  • Loan: £18,000 over 3 years at 5% APR
  • Repayments: £538.58 a month
  • Option to Purchase Fee: £200
  • Total Paid: £19,388.85 + £2000 + £200 = £21,588.85

OR:

  • A car that costs: £20,000, but you have great credit and a large deposit
  • Deposit: £8,000
  • Loan: £12000 over 3 years at 0% APR
  • Repayments: £333 a month
  • Option to Purchase Fee: £200
  • Total Paid: £12000 + £8000 + £200 = £20,200

With an HP loan, it is possible to terminate the agreement and return the car, as long as you have paid at least half of the payments. This is called ‘Voluntary Termination Clause’.

The HP finance provider, who legally owns the car, may also be liable for faults with the car as they are required to provide you with a product which meets their description and is of satisfactory quality and is fit for purpose – the ‘Supply of Goods (Implied Terms) Act’.

Unlike a normal unsecured loan, there are no fees to pay off an HP deal early.

Personal Contract Purchase Loans

A PCP loan appears to be similar to an HP loan. There are monthly payments, and you do not own the car while you are paying. However, with a PCP loan, the loan is not for the full amount of the car. It is for the difference between the value of the car now, and the predicted value of the car at the end of the agreement.

This means the amount you are paying is much smaller, but the ‘Balloon Payment’ which you can choose to pay at the end in order to own the car, is much larger, and can include up to £500 in fees.

If the ‘Balloon Cost’ is smaller than the current market value of the car, most companies offer their customers to use that equity to enter into a new PCP deal. This would mean you get a new car, but start the deal all over again. Most people take this option.

So:

  • A car that costs: £20,000
  • Deposit: £2,000
  • Estimated Value of the car in 3 years: £12,000
  • Loan: £8,000 over 3 years at 7% APR
  • Repayments: £246.23 a month
  • Total Paid: £8,864.32
  • Then you are given a choice to end the deal as it is, begin again with a new car, or buy the car you have.
  • If you want to buy the car, you must pay: £12,000, making the new total you have paid: £20,864.32

If you begin again with a new car, it is worth noting that you may be able to get a better monthly deal leasing a car in the traditional method. You will never have the option to buy the car, but it could save you money.

Be aware that your loan could have additional charges, such as over-mileage charges where you are charged for driving over your original yearly estimate, or charges for wear and tear when you return the car.

Advice

If you want to own your car, clearly the best thing to do is have a huge deposit and great credit so that you can negotiate for 0% Finance with an HP Loan. But, this isn’t possible for most people. There are many many factors to consider, such as varying interest rates, lengths of loans and monthly repayment limits which will decide what is actually best for you and your specific circumstances.

In terms of the overall amount you are paying, PCP and traditional loans are better than HP Loans. Individuals offers will vary, depending on rates and the quoted estimated value of the car. But PCP loans are only advisable if you know you will have, similarly to the 0% Finance option, a huge amount of money to spend in three years time. This could be beneficial to the rare people who do have a very large deposit, but a poor credit rating. If you will not have this money, it is advisable to look into traditional car lending options as it would essentially be the same service, but for less money.

Ultimately, in terms of buying when you don’t have a large lump sum at the ready, the traditional loan, if you can get a favorable rate, is still more advisable than PCP and HP loans. But, if you have a poor credit rating driving up your interest rates, it may be worth looking into HP loans as an alternative.