Making Car Ownership Affordable – The Benefits of Car Finance
The Costs of Car Ownership
Having a car is essential for many British commuters, but buying a new car outright brings many costs you might not have considered. However, while there are lots of affordable cars to buy with no monthly fee, finding the right car can be difficult.
That’s why car finance is so popular in the UK and beyond, because you can account for your car payments as part of your monthly budget rather than paying for everything in one go.
In this article, we’ll explore everything you need to know about car finance, from available options to financial implications, pros, cons, and more. This will equip you with the knowledge you need about car finance to help you make an informed decision about your next car.
What is Car Finance and What Options Are Available?
Car finance covers the finance options available for buying a car without buying it upfront and a finance agreement is a personal contract that can come in several forms and from different lenders. Let’s explore the most common providers of car finance agreements.
PCP – Personal Contract Purchase
Personal Contract Purchase is one of the most popular ways to broker a finance agreement on a vehicle. Not only is it cost effective with a flexible deposit, but it also gives users three options to choose from (keep, trade, or return) at the end of the contract.
Since its introduction in the late 90s, Personal Contract Purchase has become one of the most chosen methods for leasing a vehicle. Built upon a traditional Hire Purchase (HP) agreement, the biggest difference between both finance options is the value of the vehicle, which is decided at the start of the initial contract and then deferred until the end.
This value, also known as the Guaranteed Minimum Future Value (GMFV), is determined by a list of criteria: such as the starting mileage, an annual mileage limit as projected by the user, and the car’s age.
It’s important to remember that unless you choose to pay this GMFV at the end of your finance deal – the car is not yours.
PCP car finance works as a form of leasing, so making any changes or exceeding the limits outlined in your contract may have financial repercussions.
HP – Hire Purchase
When it comes to financing vehicles, a Hire Purchase agreement is one of the simplest ways to secure finance for the car of your dreams. This method lets you pay for your car over a number of easy, fixed monthly payments, usually over a specified period between 2 and 5 years, with ownership passing to you at the end.
These monthly finance payments are fixed at the beginning of your Hire Purchase (HP) agreement term, alongside the interest rate you will be expected to pay. No surprises. After your initial deposit has been placed, these payments will continue over the course of the contractual term – and the car officially becomes yours once the final outstanding payment is completed.
If you’re looking for a PCP or HP quote, try our calculator here.
Hire Purchase + Balloon
For Hire Purchase with Balloon, the value of the vehicle is determined at the beginning of your contract. You decide on how much of that value you’d like to offset to the end of the agreement, known as the “Balloon”. After making the initial deposit (typically flexible between 10-30% of the car’s value), the remainder is financed to you through one of our approved lenders with additional interest.
Magnitude Finance’s long-standing relationships with these lenders ensures that we always find you the best deal. A typical Hire Purchase with Balloon agreement is spread over a period of 36 to 48 months.
Balanced Payments Plans
Balanced Payment plans distinguish themselves in several ways from other finance options. While Hire Purchase agreements, whether they include a Balloon payment or not, and Personal Contract Purchase deals typically use a fixed interest rate, Balanced Payment plans feature monthly repayments that vary according to the chosen lender’s reference rate. For some customers, these plans offer the option to offset a Balloon payment, but this isn’t suitable for everyone — it’s crucial to discuss your specific needs with our dedicated and expert concierge team.
Our access to these special offers stems from our long-standing relationships with numerous lenders, relationships we have nurtured and cultivated over years. As a broker, we bridge the gap between these financial contacts and our clients. You can trust us as your partners to find the best possible deal, thanks to our established connections, which are typically beyond the reach of the public.
For HP + Balloon or Balanced Payments quotes, contact our concierge team here.
Loans from Banks
Bank loans are a popular tool for customers around the UK. With any bank loan, repayments are made with an annual percentage rate added, and you probably won’t have to pay an initial deposit as part of the agreement.
If you choose a bank loan, you might be able to secure a lower interest rate, but these loans are unsecured, meaning they aren’t tied to your vehicle. So if you decide to sell your car, the loan will need to be paid off separately.
ADVANTAGES OF FINANCING A CAR
Financing a car is a great option if you don’t have the funds available to buy one outright. You’ll also get access to the vehicle immediately and monthly payments will be based on your affordability.
On top of this, you can build your credit rating and history with car finance, as long as you keep up with your monthly repayments. Building a credit score is a useful tool for life and shows lenders that you are reliable and will pay back the money they lend you.
CAR FINANCE AGREEMENT INTEREST RATES AND TERMS
Before you commit to car finance, you must learn about interest rates and terms for your purchase.
UNDERSTANDING INTEREST RATES AND APR
APR stands for Annual Percentage Rate, which is the interest applied to your car finance deal.
The APR of the finance agreement decides how much you are charged for borrowing from the lender. The higher the APR, the more you will pay in interest, but the cheapest APR may not always mean the cheapest monthly payment, as lenders will provide balloons for vehicles based on their own valuation.
A top tip is to keep an eye on the representative rate, this shows what the majority (over 51%) of a broker’s customers receive when applying for finance. With Magnitude, our representative rate is the same as our lowest available rate (8.9%), so the majority of people applying at that rate, get it, unlike some other finance brokers whose representative rate can be much higher than their advertised rate.
The best advice is to shop around for the best APR for your circumstances.
HOW LOAN TERMS AFFECT MONTHLY PAYMENTS AND OVERALL COST
Generally speaking, car finance agreements are available with repayment periods of up to five years (sometimes more dependent on the lender), with most people choosing between three and five-year deals.
We find the most common term for PCP is four years, as the balloon usually allows for lower monthly repayments or a traditional HP, which would normally be spread over five years to keep the monthly payment down.
FIXED VS. VARIABLE INTEREST RATES
A fixed-rate loan has a fixed interest rate for the duration of your agreement, predetermined at the beginning of the term. This is the most secure option, providing a stable and predictable way to finance a car.
Variable rates fluctuate depending on the Bank of England’s base rate. A variable loan can be a good option if rates are declining, but there is no guarantee of this, so your rate could also rise.
DEPOSITS AND THEIR IMPACT
Deposits on your car finance bring down the overall cost of your loan, making it a cost-effective option if you have the funds available. In addition, you’ll potentially pay less interest because you’re borrowing less. Some lenders may require more deposit adding to a deal than others, 10% is usually an accepted average, with some asking for more. Some lenders don’t require you add a deposit at all, although this will mean you have higher monthly payments and pay more interest over the course of your agreement.
REFINANCING CAR LOANS
Car refinancing involves a new finance agreement and using it to repay your existing contract. Doing so may mean you can access a lower rate, or it can be used ‘extend’ your term in a car you want to keep for longer.
BENEFITS OF REFINANCING
One of the key benefits of refinancing is to achieve a lower interest rate. You might also be able to reduce the monthly payments or finance a balloon payment as part of a PCP finance deal. Most people refinance if they’ve found a better deal than they currently have which may not have been available previously.
STEPS TO REFINANCE A CAR LOAN
- Request a settlement figure from your lender.
- Provide information and undergo financial checks.
- Undergo vehicle checks such as confirming ownership and condition.
- Complete the paperwork for your new agreement.
UNDERSTANDING THE FINE PRINT
Fine print is the downfall of many finance applications, so here’s what to look for if you’re applying for a vehicle.
HIDDEN CHARGES
Firstly, make sure the interest rates you pay accumulate to a total cost you’re happy with when the term is complete. They may seem reasonable now, but the full cost might not be if you don’t take care to pay attention to your contract.
If you go over your pre-determined mileage for the term, you will be charged for excess mileage at the end of your contract.
If you return the car at the end of the agreement in a condition that is worse than the ‘reasonable wear and tear’ stated in your contract, you will also be charged.
Early repayment fees can also be part of your contract, although these tend to be on more high-end vehicles, so ensure you double-check your contract before you sign it and you’ll avoid any potential pitfalls.
FINANCIAL PLANNING FOR CAR OWNERSHIP – CREATING A BUDGET FOR CAR EXPENSES
Car financing brings many benefits for people who don’t have the funds to buy a car upfront and in full. As long as you factor in insurance, maintenance, and other costs like car depreciation and resale value, you can bag your dream car and not break the bank.
However, it’s important to explore your financing options in detail and compare the best deals to find something suitable.
CHOOSE MAGNITUDE FOR YOUR NEXT CAR
With rates starting at 8.9% APR we compare finance offers from an extensive panel of lenders to find you the best deal. With a Trustpilot 5-star rated team boasting incredible knowledge of the finance market.
Try our online calculator for quotes in just a few taps, or contact our team to secure your next dream car.
8.9% APR Representative
We are a credit broker, not a lender.