When buying and owning a vehicle, sometimes a bit of financial support is needed.
There are many car loan options at carmoney.co.uk and other brokers for this reason. It is important to understand what options are there to actually own a vehicle.
Car finance and traditional car loans are two commonly talked about methods. Although these terms are sometimes used interchangeably, they both represent different ways of financing a vehicle. We take a look at their differences and which might be the best fit for your situation.
What is Car Finance?
Car finance is a range of agreements designed to enable people to buy vehicles without having to pay all at once. Often they involve paying installments over a fixed term. These deals differ from standard loans in that the vehicle is the centerpiece of the agreement.
Common Types of Car Finance Agreements
Personal Contract Purchase (PCP)
This flexible option is becoming more and more popular. PCP is where you pay a deposit and then monthly payments to cover just part of the value of the vehicle. After the contract ends, you can either return the car, trade it in for another model or pay a balloon payment to take ownership of the car.
Hire Purchase (HP)
Under HP agreements, the vehicle’s full cost is spread over regular installments. When all payments are done, the ownership is transferred to you automatically. It’s one way to own a car over time.
Understanding Car Loans
On the other hand car loans are inclined in the form of personal loans to give you the lump sum to cover the vehicle cost. This is money borrowed which the borrower has to repay along with interest in a fixed time period. The loan is not tied to the car itself, and the vehicle purchased with the funds is the buyer’s immediately.
Advantages of Car Loans
- Immediate Ownership: Once you purchase the vehicle it is yours outright.
- Flexibility: You can sell the car without restrictions.
- No Mileage Limits: Unlike most finance agreements, there are no mileage restrictions on car loans.
Key Distinctions Between Car Finance and Car Loans
Ownership Structure
With car finance agreements, you don’t own the vehicle outright until all payments are paid or one final lump sum is paid. However, with car loans, you can own the purchased vehicle immediately.
Repayment Models
With finance options like PCP payments are based on the depreciation of the car’s value rather than the cost of the car. But HP spreads out the total vehicle price over installments. The interest you pay on car loans is due in full, unlike the interest on your credit card.
Flexibility at Contract End
PCP offers various choices at the agreement’s conclusion: You can return the vehicle, pay a lump sum or upgrade. With HP and car loans, they don’t have this flexibility but offer different benefits — for instance, with car loans, the vehicle’s ownership is not conditional.
Mileage Restrictions
Mileage caps are common in finance agreements. Additional fees may be applied if you exceed these. No such limitations exist with a car loan, so you can drive as you please.
Credit and Affordability
The affordability varies with both options, but it depends on credit worthiness. Monthly payments with PCP are normally lower than HP or car loans. Finance options like PCP might be more popular if low upfront costs are important to you.
Choosing the Right Option for You
You will have to choose between these two depending on your preference, financial situation and long term goals. PCP might appeal to those who want flexibility and lower monthly payments. But HP is for buyers who want to own it eventually and on straightforward terms. The car loan options brokers like carmoney.co.uk can find are a practical solution for immediate ownership without contractual obligations.
