Guest Contributor: Creditplus, An e-zoomed Partner
What Is Car Finance?
Car finance, in its simplest form, is a loan taken out to purchase a vehicle. There are a variety of products available but it’s important to note that all will be ‘secured loans’ which means the lender uses the vehicle as collateral, in case the borrower defaults. In this case, the lender will make a repossession of the car to recover their costs. As the lender has this ability, and therefore reduced risk, you’re likely to have a greater credit limit and lower interest rates compared to an unsecured loan – such as a bank loan or credit card.
So, if car finance is the right route for you, the next step is deciding which product to use. The overwhelming majority of drivers opt for two options: hire purchase or personal contract hire.
Personal Contract Purchase, commonly referred to as PCP, is a finance solution which usually results in the lowest monthly repayments. This is because you will be taking out a loan for the depreciation whilst you’re using the car.
For instance, if you’re looking to finance a £15,000 car over four years, that car could only be worth £7,000 (this figure is called GFV or Guaranteed Future Value) at the end of the agreement – however, your loan is for £8,000. This means your monthly payments are less, but after those four years, you will either have to pay the remaining £7,000 ‘balloon payment’ or hand the car back. There are also penalties for exceeding annual mileage limits and the condition of the car if you choose to hand it back.
Hire Purchase (HP) on the other hand has a simpler equation. The vehicle value, minus any deposit, is divided by the number of months you’re financing for and interest is added evenly across the installments. At the end of the agreement you own the car outright, without the need for a balloon payment. There are no annual mileage limits but as you’re paying for the full value over a few years, this can result in higher monthly payments versus PCP.
Jumping back to PCP, lets discuss the Guaranteed Future Value, or GFV. This is also sometimes referred to as GMFV for Guaranteed Minimum Future Value. Either way it’s a figure derived from the expected value of the vehicle at the end of the finance agreement. Companies will use a variety of providers to estimate the depreciation, and it will be dependent on your annual mileage, so it’s advisable to make this as accurate as possible but remember that excess mileage will incur penalties. For electric cars, there has been a hypothesis that the residual value, or GFV, is lower than their combustion alternatives. This was true when they first became available as manufacturers and lease companies were overly cautious in the nascent market. These concerns were primarily around the battery degradation and fast-paced innovation, both of which have been steadied in recent years. Today, demand for EV’s is high, either from a climate change perspective or as infrastructure becomes more prevalent. Government incentives, including the £3,500 grant and advantageous tax benefits, are encouraging new vehicle purchases over used cars, however once these electric cars reach market price there will always be demand from different demographics.
What Should I Lookout For When Choosing A Finance Solution?
When financing a used car especially, there are a variety of factors to ensure you’re getting a good deal and driving away with a good car.
Firstly, it’s important to make sure you understand the different products available to you and decide which one suits your personal circumstances. If you’re likely going to be changing your car regularly then a PCP could be your best option, but if you’re keen to own the vehicle outright after a few years and keep it, or are raking up the miles, then HP could be a better solution.
Secondly, by shopping around or using a broker, you’ll have access to a wider range of options for your chosen product. Creditplus, for example, offer customers over ninety lending options and can take care of sourcing, financing and the delivery.
Which leads us on to point three: buy the vehicle from a reputable dealer. There is more choice than ever before when it comes to getting the money for a car, but when it comes to the metal you should ensure you’re purchasing from an approved dealer. Dealers can be approved by manufacturers or industry-bodies, such as the RAC. Cars will undergo rigorous tests and repair work prior to being sold and often include warranties which give you peace of mind when you finally hit the open road.
Finance Versus Outright Purchase
Half a century ago, in the 1950’s and 60’s, purchasing outright was the most popular route to car ownership, but finance became mainstream when people wanted to change cars more regularly and fixed monthly payments made it easier to budget.
Nowadays, financing a car is how the majority of people get behind the wheel. With the ability to choose the number of years you’d like to make repayments, it’s easier to manage your money without having to save up for the total amount. Innovative solutions like PCP, where you pay for the depreciation (but you knew that already!), make luxury cars, and electric vehicles, more affordable and enable people to keep up to date with the latest releases.