Car finance deals are increasingly becoming popular among Brits who previously took out a car loan from high-street banks, and the most popular car finance deal is PCP, a reason for a sudden rise in the number of cars running on roads.
Unlike high-street loaning, the monthly payment size will be very small in PCP, which is set up based on the amount you pay as a deposit and the estimated value of the vehicle at the end of the loan term.
This is a favourable deal as you can either hand the car back or pay a balloon payment to own a car. Seeing the popularity of such deals, private lenders have begun to advertise car finance deals with no deposit.
Refrain from taking the bait when choosing car finance deals.
If you take out a loan from a private lender to finance a car, you are borrowing a personal loan, also called an auto loan. Car finance deals are dealership financing, and hence only car dealers offer them.
However, the deposit is a must regardless of the funding option you apply for. A private lender would require at least 10% of the market value of a car as a deposit size. Though HP and PCP also require a minimum deposit of 10%, the latter could be flexible.
If the down payment is lower than 10%, no lender will turn you down, but interest rates could be slightly higher. Since the loan amount will go up, monthly payments will also be larger.
Some lenders provide cheap car finance deals with no deposit, but this may ruin your financial budget. As a lender funds 100% of the value of a car, it involves a very high risk on them. They will charge high-interest rates to let up the impact of a default.
Some car dealers and private lenders may not require you to pay money upfront if you have an old car to trade in. The value of your old car will go toward the down payment.
Why is PCP becoming more popular, and is it worth it?
PCPs have become so popular because you do not have to make hefty monthly instalments. Most people find it easier to make monthly payments. Further, it allows you to choose to own a car by making a balloon payment or taking it back.
Technically, PCP is a way more expensive deal than auto loans and HP if you try to own the car by making a balloon payment at the end of the contract. This is because your monthly payments have already been enough to cover the total cost of the car.
Another reason for the popularity of PCP is that they are way cheaper than traditional borrowing methods. You can be flexible with the down payment size, which is impossible with private car loans.
However, PCP is cheaper only if you want to take back the car. HP is a better option if you want to own the vehicle at the end of the loan term.
Affordability vs monthly budget
At the time of a PCP deal, you find a car dealer comparing it with a changing mobile phone. You change your mobile phone every three years, and so is the PCP. You just have to keep monthly payments; after the loan term ends, you can refinance it for a new car.
Most of the dealers would only encourage you to buy a car at the end of the term. In fact, they would want you to buy another car and renew your PCP deal. This begs the question if they adequately check your affordability.
Whether or not you are serious about buying a car on a PCP, a few questions are asked to check your affordability. Most of the questions are instead framed around finding your monthly budget.
You may not be aware, but that is true that affordability cannot be judged with the help of your monthly budget. For a PCP deal, they want you to have a monthly budget somewhere between £150 and 300.
The loan term could be up to three years. Given that you do not cross the recommended mileage and incur extra payments, you may still find the deal beyond your affordability.
You must be sure that your budget will stay the same in the span of 36 months. You may lose your job or likely encounter a medical emergency. An affordability check means ensuring your repaying capacity throughout the loan term, regardless of unexpected changes in your budget.
How to get the best car finance deal
There is no one-size-fits-all approach. To get the best car finance deal, you must ensure a good credit rating. A poor credit rating will not only reduce the size of the loan but attract higher interest payments.
Car financing from a private lender will be a better option as you own the car without any restrictions on mileage. Just put down the upfront payment and make monthly instalments. A lender will check your affordability carefully before signing off the loan.
Do proper research so you get the best lender. However, beware of those who offer the bait “no deposit” deal. No car loan exists without a deposit; if so, you will end up paying outrageously higher interest.
The takeaway
If you have decided to buy a car and you are looking to finance it, do remember the following points:
Give priority to personal loans because you own the car right from the first day.
PCP financing is better if your monthly budget can make smaller payments and you do not want to own the car.
If you want to own the car at the end of a loan term, pursue HP financing.
You will need to pay some money upfront as a down payment for all types of financing.
You must have a good credit score to avail of competitive interest rates.
Description: You need to be wise enough while financing a car to avoid debt. Know all pros and cons and then peruse which one you should use.
