When it comes to buying a car on finance, it can seem confusing. Whether this is your first time buying a car on finance or you’re looking for more information about the deal you’ve been offered, we’ve put together an easy to read guide to car finance.
What is car finance?
For many of us, the idea of buying a car outright isn’t achievable, so car finance can help us buy the car we want without having the savings in the bank.
Financing a car with a loan can depend on a few things, namely your credit history and the type of hire you are looking to take out. Different interest rates will affect the amount payable and therefore it’s important to know what you’re committing to before you sign the dotted line.
Longer contracts with lower monthly payments tend to cost more in interest overall, whereas shorter term loans that include higher monthly payments can be more cost effective.
What are the different types of car finance options?
Car finance can come in different varieties depending on your needs. Take a look at the kinds of car finance options that are common:
- Business vs personal contract
Business leases refer to vehicles that belong to a VAT registered company. They are usually cheaper than a personal lease because you can claim up to 50% of the VAT back on monthly payments which brings them right down.
Business leases are for cars that are being used for business purposes and technically belong to the company. Whereas personal car loans are for individuals looking to take out an independent contract.
- Fixed vs Variable
A fixed car loan refers to a loan where the interest rate is agreed at the start and will not fluctuate. Meanwhile, a variable loan may change throughout the duration of the contract.
- Car dealer finance
You may find that the car dealership you are buying the car from will have their own car finance options. These will be through their own lender, and although they can be convenient, often the rates aren’t as good.
What does car finance terminology mean
- APR
APR stands for the annual percentage rate that is charged for borrowing. APR refers to the percentage cost that will be added to the funds owed
- PCP
PCP car finance is one of the most common types of loans and refers to a personal contract purchase. With these loans, an individual is able to make lower monthly payments over the contract period with a final payment that can be paid at the end of the contract depending on the car’s value.
- GFV
When it comes to the final payment (or balloon payment) as it’s known, it can depend on a few things. The GFV can be agreed at the start of the contract, which means guaranteed future value. With a GFV contract the finance company will guarantee what your car is worth at the end of the contract, regardless of how much it has depreciated in value
Car Finance Calculator: What Should You Borrow?
It’s tricky to say what someone should borrow on finance, as it depends on the repayments that you are willing to pay back. This can depend on personal circumstances, your credit score, whether you’re employed or self-employed and an array of other factors too.
Using a car finance calculator can be very helpful in deciding how much you should borrow over a given time period. However, it’s worth remembering that it’s possible to negotiate the conditions of an agreement, so don’t fully rely on the car finance calculator to advise you.
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