Car Finance - What you ought to realize Dealer Finance

Car Finance - What you ought to realize Dealer Finance

Car finance has become business . a huge number of latest and used car buyers within the united kingdom are making their vehicle purchase on finance of some sort. it would be within the type of a loan, finance from the dealership, leasing, MasterCard, the trusty 'Bank of Mum & Dad', or myriad other kinds of finance, but relatively few people buy a car with their cash anymore.




A generation ago, a private car buyer with, say, £8,000 cash to spend would usually have bought a car up to the price of £8,000. Today, that exact same £8,000 is more likely to be used as a deposit on a car which could be worth many tens of thousands, followed by up to five years of monthly payments.




With various manufacturers and dealers claiming that anywhere between 40% and 87% of car purchases are today being made on finance of some sort, it isn't surprising that a lot of people are jumping on the car finance bandwagon to require advantage of buyers' desires to possess the foremost recent, flashiest car available within their monthly income limits.




The appeal of financing a car is extremely straightforward; you'll buy a car which costs tons quite you'll afford up-front, but can (hopefully) manage in small monthly chunks of cash for some time . the matter with car finance is that tons of buyers do not realize that they typically end up paying far more than the face value of the car which they do not read the fine print of car finance agreements to understand the implications of what they're signing up for.




What you would like to be wary of, however, are the entire implications of financing a car - not just one occasion you purchase the car but over the entire term of the finance and even afterward. The industry is heavily regulated within the united kingdom , but a regulator can't cause you to read documents carefully or force you to make prudent car finance decisions.

What is a Hire Purchase?

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An HP is kind of a mortgage on your house; you pay a deposit up-front then pay the rest off over an agreed period (usually 18-60 months). Once you've made your payoff, the car is officially yours. this is often often the way that car finance has operated for several years, but is now starting to lose favor against the PCP option below.




There are several benefits to a Hire Purchase. it's simple to understand (deposit plus a spread of fixed monthly payments), and thus , the customer can choose the deposit and therefore the term (number of payments) to suit their needs. you'll choose a term of up to five years (60 months), which is longer than most other finance options. you'll usually cancel the agreement at any time if your circumstances change without massive penalties (although the number owing could even be quite your car is worth early within the agreement term). Usually, you will find yourself paying less in total with an HP than a PCP if you plan to remain the car after the finance is paid off.

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The main disadvantage of an HP compared to a PCP is higher monthly payments, meaning the price of the car you'll usually afford may be a smaller amount.



An HP is usually best for buyers who; plan to keep their cars for an extended time (ie - longer than the finance term), have an outsized deposit, or need an easy car finance plan with no sting within the tail at the highest of the agreement.

What is a personal Contract Purchase?

A PCP is typically given other names by manufacturer finance companies (eg - BMW Select, Volkswagen Solutions, Toyota Access, etc.), and is extremely popular but more complicated than an HP. Most new car finance offers advertised lately are PCPs, and typically a dealer will plan to push you towards a PCP over an HP because it's more likely to be better for them.


At the highest of the term, there's still an outsized chunk of the finance unpaid. this is often often usually called a GMFV (Guaranteed Minimum Future Value). The car nondepository financial organization guarantees that, within certain conditions, the car goes to be worth a minimum of the utmost amount due to the remaining finance owed. this provides you three options:


1) Give the car back. you'll not get any a refund, but you'll not got to disburse the remainder . this means that you simply simply have effectively been renting the car for the whole time.



2) disburse the remaining amount owed (the GMFV) and keep the car. as long as this amount could be many thousands of pounds, it isn't usually a viable option for several people (which is why they were financing the car with within the first place), which usually leads to ...



3) Part-exchange the car for a replacement (or newer) one. The dealer will assess your car's value and appearance out of the finance payout. If your car is worth quite the GMFV, you'll use the difference (equity) as a deposit on your next car.

LikeThe PCP is best fitted to people that need a new or near-new car and fully shall change it at the top of the agreement (or possibly even sooner). For a personal buyer, it always works out cheaper than a lease or contract hire finance product. you're not tied into going back to an equivalent manufacturer or dealership for your next car, as any dealer pays out the finance for your car and conclude the agreement on your behalf. it's also good for buyers who need a costlier car with a lower cashflow than is typically possible with an HP.


The disadvantage of a PCP is that it tends to lock you into a cycle of adjusting your car every few years to avoid an outsized payout at the top of the agreement (the GMFV). Borrowing money to disburse the GMFV and keep the car usually gives you a monthly payment that's little or no cheaper than starting again on a replacement PCP with a replacement car, so it nearly always sways the owner into replacing it with another car. For this reason, manufacturers and dealers love PCPs because it keeps you returning every 3 years instead of keeping your car for 5-10 years!

What is a Lease Purchase?

An LP may be a little bit of a hybrid between an HP and a PCP. you've got a deposit and low monthly payments sort of a PCP, with an outsized payoff at the top of the agreement. However, unlike a PCP, this payoff (often called a balloon) isn't guaranteed. this suggests that if your car is worth but the quantity owing and you would like to sell/part-exchange it, you'd need to disburse any difference (called negative equity) before even brooding about paying a deposit on your next car.


Read the fine print

Many people make the error of shopping for a car on finance then find yourself being unable to form their monthly payments. as long as your finance period may last for subsequent five years, it's critical that you simply carefully consider what may happen in your life over those next five years. Many heavily-financed sports cars have had to be returned, often with serious financial consequences for the owners, due to unexpected pregnancies!


As a part of purchasing a car on finance, you ought to consider and discuss all of the varied finance options available and make yourself conscious of the pros and cons of various car finance products to make sure you're making informed decisions about your money.


Stuart Masson is founder and owner of The Car Expert, a London-based independent and impartial car buying agency for anyone looking to shop for a replacement or used car.


Originally from Australia, Stuart has had a passion for cars and therefore the automotive industry for nearly thirty years, and has spent the last seven years working within the automotive retail industry, both in Australia and in London.


Stuart has combined his extensive knowledge of all things car-related together with his own experience of selling cars and delivering high levels of customer satisfaction to bring a singular and private car buying agency to London. The Car Expert offers specific and tailored advice for anyone trying to find a replacement or used car in London.

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