You’ve found the perfect car. It’s everything you need plus more: four wheels, five doors, and a bumper sticker that says ‘Carpe Diem’. But which of the many car finance options do you choose?
The world of vehicle finance can be a confusing place - but not with Amigo Loans at hand. Our guide will take you through the best options to help you pick out the right finance.
Should you buy a car outright or take out car finance
If you can, it’s usually best to buy a car outright instead of choosing finance. This will almost always be the cheapest option and means you own the car in full from the moment you have the keys.
Unfortunately, buying a car outright is easier said than done. If you don’t have enough savings put away then you’re either going to need to choose a car with a lower asking price, or go down the path of vehicle finance.
So what does vehicle finance mean?
What is vehicle finance?
Vehicle finance refers to borrowing money to buy a car, and then repaying that money over a period of time.
This can be great for people that can’t afford to buy a vehicle outright as it means they can still purchase the car they need. The downside is that there are a number of options for buying a car on finance, and it can be confusing to know which one is best.
It’s usually best to buy a car outright instead of choosing finance. This will almost always be the cheapest option and means you own the car in full.
First you have the personal loan for car finance. Then there’s the hire purchase, with the credit (the money you’re borrowing) going straight to the car dealer. And if neither of them float your boat (spin your wheels?) then you have the balloon hire purchase, which is the most complicated of them all. But more on that later.
We’ll run through the pros and cons of each, one at a time.
What is a personal loan for car finance?
A personal loan for car finance is exactly what it sounds like.
It’s a loan in your own name, usually from a bank or another loan provider, where you use the cash you’ve borrowed to buy a car.
The advantages of a personal loan for car finance
- As you’ve paid for the car in cash, you’ll own the car outright. The only exception is if you borrow a secured loan which is secured against the vehicle.
- If you already have some funds set aside for your car purchase, you can take out a smaller loan to make up the difference. You don’t need to borrow the whole price of the car.
- You can also use a loan to pay for the vehicle’s insurance and road tax. Depending on the APR you’re offered, this can work out cheaper in the long run than paying for these monthly.
- Loans are the most flexible option for vehicle finance, so you can borrow exactly the amount you need and repay it over a term that works best for you.
- You can often repay a personal loan early without any extra fees or charges.
The disadvantages of a personal loan for car finance
- As you own the car outright, you’ll be solely responsible for repairs and running costs.
- If your credit score isn’t up to scratch, you could miss out on the best rates and end up with a loan with a higher APR.
- As you receive the loan funds before paying the car dealer, this process can take longer than other forms of vehicle finance where the credit goes to the dealer directly.
What is a hire purchase?
With a hire purchase, the exact finance you need goes straight to the car dealer without you needing to handle the cash.
The advantages of a hire purchase
- A hire purchase is usually quick and easy to arrange directly with the car dealer.
- Interest rates are competitively priced and usually fixed, meaning you can rely on them not to change further down the line.
The disadvantages of a hire purchase
- You don’t own the car outright until the final payment.
- You’ll need to pay a deposit (generally around 10% of the car’s asking price).
- A hire purchase can be more expensive if you’re looking for a short-term arrangement.
- Likely to have fees for paying off the hire purchase early.
- There can be other hidden charges, such as for going over the annual mileage in your contract.
What is a balloon hire purchase?
A balloon hire purchase is similar to a normal hire purchase except for a few key things.
First of all, the monthly repayments are less. That sounds great, but then you don’t actually own the car at the end of the contract. Instead you’ll usually get a choice - you can pay off the remaining value of the car in one lump sum once the contract is over, and then you get to keep the car. Or, you can return the car and get a brand new one and keep up the monthly repayments.
The advantages of a balloon hire purchase
- A balloon hire purchase will usually have the lowest monthly costs, and means you can get a new car every few years.
- You shouldn’t have to buy the car at the end of the contract if you don’t want to. Saying that, some dealers do make you buy the car - effectively making it a normal hire purchase but with a large payment at the end of the contract - so check this before you go ahead.
- Servicing and maintenance costs are often included in the monthly payments.
- As you can return the car and get a new one, you don’t need to worry about the car depreciating in value.
The disadvantages of a balloon hire purchase
- There are limitations over the type of car you can get.
- Balloon hire purchase is usually only available for brand new cars, locking you into a contract that is worse value than buying second hand.
- The dealer owns the car, so if you return the car with damage, you’ll have to pay for it.
Which one is best for you
Which option for vehicle finance is best for you comes down to a few things.
Do you want the finance to cover the insurance and road tax as well, with the option of paying off early to save money? If so, a personal loan could be your best option.
Do you want a minimal-stress, competitively priced option that you’re happy to commit to for a few years? Then go for a hire purchase.
If or if you’d like to maintain lower monthly payments, and don’t mind that you won’t own the car at the end of the contract? Then consider a balloon hire purchase.
Whichever you choose, just remember to look at the APR you’re being offered. Whether the APR you’re offered is high or low usually comes down to how your credit score stacks up. And if you want any tips on boosting your score to get the best deal, we’ve got you covered here.