Car Finance - Pros and Cons

by : David Lynes



Buying a new car is a luxury for some people but a necessity for others. Many of us know how difficult life can become with an unreliable old banger that's on its way out, but most of us don't have thousands of pounds lying around that we can use to purchase a new car. This is where car finance can prove invaluable, and there are a number of options available when it comes to financing.

When selecting the right form of finance for your needs and circumstances it is important to weigh up the pros and cons so that you end up with a suitable finance package and do not pay over the odds.

Standard loans: You can get standard car loans from a wide range of lenders, from Internet only lenders to high street banks. The advantages of this type of finance include the freedom of being able to get your car from anywhere rather than being restricted, the availability of competitive interest rates, and a wide choice of lenders. One of the main disadvantages is that you need to have a decent credit history and rating to take out a standard loan.

Dealership finance: Finance through the dealership has become popular over recent years, particularly with those that have damaged credit who cannot get finance through a mainstream lender. The benefits of dealership finance include being able to sit down and work out a finance plan more or less right away once you have found the car you want, and also being able to get the finance even with poor credit in many cases. On the downside this type of finance can be costly, and you are also restricted, as you have to purchase a car from the showroom that is offering you the finance.

HP: Hire Purchase is one of the most straightforward ways of purchasing a car. This is where you make monthly payments on the car until the total amount of the purchase price plus interest has been paid off, after which the car belongs lock, stock, and barrel to you. The good news is that HP is a simple way to finance your car, and is more easily available than many bank loans. On the downside it can be an expensive way to purchase your car, and you may pay high rates of interest.

PCP: Similar to hire purchase in many ways PCP (personal Contract Plan) is an effective way to purchase a car or ensure that you always have a reliable car. With these plans you borrow around 75-80% of the car's value over a three years period, and at the end of the three years you can pay the remaining 20-25% and keep the car, hand the car back and pay nothing more, or stay on the plan and switch to another new car. The advantages include affordable monthly repayments, flexibility with a choice of options with regards to what you can do at the end of the term, and in some cases payment of maintenance charges. On the downside you do have to stick to mileage limits and you could find that there is an increased risk of negative equity.