By Sky Motoring
26 September 2007
Decided what you want to buy? Now you might need to borrow some cash…
It's very easy to start nodding off as soon as the F-word is mentioned but most people, unless they’ve either robbed a bank or won the lottery, buy their car on some sort of finance deal. But before you borrow some money, consider your options.
Personal Loan
It may not always be the cheapest payment method, but applying for a loan from your current bank is probably the quickest and easiest way to borrow money. Banks can either lend money based on your salary or on equity withdrawal from your property.
However, unless we’re trying to fund that Lamborghini Gallardo you’ve been dreaming about, spreading repayments over the period of a 25-year mortgage can be a very costly process. Best to stick with a loan based on what you earn and therefore, what you can afford to pay back. If you have a bit more time, head to an online broker, such as moneysupermarket.com and compare the most competitive deals.
The good news with personal loans is that you own the car outright from day one and you can haggle for a more competitive rate. Those loan rates you see are not set in concrete. Remember that banks will try and make a bit more money out of you by offering payment protection schemes. Consider this option carefully before saying yes, because such schemes can increase your monthly repayment fees substantially.
Personal Contract Purchase
PCP has become the preferred choice in dealerships and is offered by a number of manufacturers. It involves you putting a deposit down and then paying monthly instalments. At the end of an agreed time, usually three years, there is a final payment called the minimum guarantee future value (MGFV), better known as the balloon payment. You then have the option to pay the balloon payment and own the car outright, or give the car back. If you do give the car back, dealers may then try to convince you into setting up another PCP scheme with a newer model.
Hire Purchase
A hire purchase usually involves an up front deposit, with the rest of the balance paid off in monthly instalments over an agreed period of time. You may only own the car outright when you have made all payments but an advantage is that your HP loan is secured to your car - debt collectors can’t come knocking for your house keys if you can’t afford to pay up. Most car dealers offer HP agreements, but their APR rates (ie. the interest paid on borrowing) vary dramatically. Make sure you shop around before signing anything.
Remember that if you start having difficulty paying any type of loan, contact your lender as soon as possible. Remember it’s in their interest to rearrange terms and help you pay back the loan in its entirety.
Personal Contract Hire
Think of Personal Contract Hire as a ‘pay as you go’ car loan. Effectively, you are renting a car with monthly instalments covering you for servicing, maintenance and depreciation. Though these costs are always less than with a PCP or HP and the ‘full maintenance deals’ offer considerable peace of mind, you’ll never actually own ‘your’ car outright.