Understanding How Car Financing Works

Understanding How Car Financing Works

There are a lot of options for purchasing a new car. It is without a doubt ideal if you pay outright in cash, but let’s admit that not all of us are gifted with so much wealth, so we need an alternative way to pay for our dream vehicle. We have to assess and consider the running costs that we will need to cover in the long run. One of the most popular payment choices is seeking help from car financing companies. Let us look at how this works.

Personal loan

Purchasing an automobile using a personal loan is the cheapest method by far to finance a car deal; that is if you have a good and competitive credit score. You can acquire a loan through your bank, building society, or other finance provider. The good thing is, you can also extend the payment for one to seven years. In this case, you need to learn how to haggle and negotiate to get a competitive fixed rate to reduce the cost.

Personal Contract Purchase (PCP)

Through the PCP deal, you make lower monthly payments, plus you might take advantage of a company’s no deposit car finance offer. For this, you can get a loan for the difference between the car’s price during its first release, and predicted value at the end of your contract. An annual mileage forecast over the term of agreement is the basis of its value. Once your hire-agreement ends, you have the choice to trade the car in and start from zero or pay a final payment of the resale price of the vehicle so you can keep it. Repayment terms are flexible from 12 to 48 months.

Personal Contract Hire (PCH)

PCH is like property leasing. You will pay the dealer a monthly fixed rate, inclusive of the servicing and maintenance fees, considering that the car mileage won’t exceed the designated limit according to your agreement. At the end of the contract, you will have to return the car. For this, repayment terms are flexible from 12 to 36 months. However, monthly costs are higher than the PCP option, and the deposit could balloon up to an equivalent of 3 months of rental.

Peer-to-peer loans

Also known as social lending, peer-to-peer loans involve no banks or building societies. This system allows borrowing and lending of money through social institutions. However, you still need to have a good credit score to get the best interest rate. Also, you must not have any previously missed payments since this will negatively affect your rating. There are some, but few, peer-to-peer lending loans that provide lower interest rates than banks, so keep an eye out for them.

Before making a final choice, consider which of these finance methods can give you a deal which you can afford for the whole term of the loan. If you don’t religiously pay, you might lose your car, so be meticulous in budgeting your expenses.


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