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Car Finance Explained

Most people who buy a nearly new or used car use finance to pay for it. We’ve put together a short guide on getting finance through Unbeatablecar, the different types of finance we have on offer and the pros and cons of each type.

On PCP finance you pay a regular monthly fee for a fixed term then at the end of this term you have the option to buy the car as the final payment of the agreement for a pre-determined amount.

You choose the amount to pay as an initial deposit, then pay a regular monthly fee over a fixed term of your choice usually 36 months. The monthly fee will depend on the APR (which on our cars is identical across all of our main lenders) the amount of deposit, the cost of the car and the GFV.

(Note: The APR rates can increase for lenders who specialize in obtaining finance for customers who have bad credit or have had difficulty in the past)

At the end of the agreement usually as the last payment you have the option, but are not obliged, to buy the car for a pre-agreed price, called the GFV (Guaranteed Future Value)

So at the end of the agreement you have 3 options:

1.) Give the car back and walk away.

2.) Buy the car for the GFV and own it, this can be done as a lump sum or can be paid monthly as a separate loan.

3.) Trade in the car for a new one, using the GFV as part of the payment.

Advantages:

  • Generally lower monthly payments than HP or Bank Loan
  • Deposits are usually flexible, you choose the amount to put in
  • Flexible terms (usually 12-48 months)
  • Choice of options at end
  • Can be paid off early (Ts and Cs apply)
  • Guaranteed Future Value (GFV) protects you against the problem of negative equity.
  • Protection under the Consumer Credit Act, Termination and Satisfactory Quality Rights.
  • Lower payments means you might be able to afford a newer car
  • Newer model means lower maintenance costs

Disadvantages:

  • If you chose to hand the car back, and it isn’t in a good condition, or a condition that exceeds ‘Normal wear and tear’ you may have to pay a fee to compensate for this.
  • If you chose to hand the car back and you have exceeded the previously agreed mileage limit (Set by you) you have to pay a cost per mile at a rate agreed beforehand.

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HP finance is a loan which is secured against the car, similar to taking out a mortgage on a house.

You choose the amount to pay as an initial deposit, then an agreed monthly fee which is dictated by the amount of initial deposit, cost of the car and the APR. The length of the loan is chosen by you to suit your budget and can vary from 12 – 60 months, but once all payments are made you are then the owner of the car. Until you make all the payments the finance company still owns the car, but you are the registered keeper.

Advantages:

  • Quick and easy to arrange
  • Low deposits (can be zero)
  • Flexible terms (usually 12-60 months)
  • Competitive fixed interest rates.
  • Unlimited mileage.
  • You can hand the car back and walk away after 50% of the loan has been paid.
  • Can be paid off early (Ts and Cs apply)
  • Protection under the Consumer Credit Act, Termination and Satisfactory Quality Rights

Disadvantages:

  • Monthly payments are higher than PCP
  • No Protection against negative equity
  • No Guaranteed Future Value (GFV)

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Lease Purchase is similar to a Personal Contract Purchase (PCP), with an agreed sum at the end of the agreement, but the final sum is not a guaranteed future value of the vehicle. (Lease Purchase final balance sum is usually higher than PCP-GFV)

You choose the amount to pay as an initial deposit, then pay a regular monthly fee over a fixed term of your choice usually 36 months. The monthly fee will depend on the APR the amount of deposit, the cost of the car and the final balance sum.

At the end of the agreement you have 2 options usually as the last payment you have the option to pay the final balance sum and buy the car, or trade in the car for a new one.

Advantages:

  • Generally lower monthly payments than HP, PCP or Bank Loan.
  • Ideal if you like to drive the newest model, you want to keep your monthly payments lower or you don’t want to be subject to excess mileage clauses.
  • Deposits are usually flexible, you choose the amount to put in
  • Flexible terms (usually 12-48 months)
  • Can be paid off early (Ts and Cs apply)
  • Protection under the Consumer Credit Act, Termination and Satisfactory Quality Rights
  • Lower payments means you might be able to afford a newer car
  • Newer model means lower maintenance costs

Disadvantages:

  • If you chose to part exchange the car and the value doesn’t cover the final balance sum you will have to cover this amount from your own pocket.
  • A significant proportion of the credit is deferred until the end of the contract so you should prepare for this

When you take a Bank loan out from the bank/finance company, there is no need to provide a deposit and the loan is not secured against the car. you pay back the loan over a fixed monthly term usually 12 to 72 months, the amount of payment is dictated by the amount of the loan and the APR.

You can do whatever you want with the car, you own it, you can sell it or part exchange it without having to settle the outstanding balance owed, you just have to keep paying off the loan until the the end of the term.

Advantages:

  • Can cover cost of whole vehicle
  • Own the car from the beginning

Disadvantages:

  • Payments are usually higher than PCP or Lease Purchase
  • Loans can take up to 14 days to arrange
  • Have to wait for funds to appear
  • Can affect other borrowing
  • Need good credit rating
  • Banks have varying loan rates, a lot of shopping around to find the best one.
  • No Protection against negative equity
  • No Protection under the Consumer Credit Act, Termination and Satisfactory Quality Rights.
  • Can have early settlement penalties