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Car Loan vs Car Finance – Which is Better?

For many drivers, paying for their next car in cash is a thing of the past! The emergence and popularity of car loans and car finance makes it easier than ever for drivers to spread the cost of their next vehicle. Both car loans and finance enable customers to make monthly payments towards the value of a car and have options to own the vehicle, depending on which you choose. The structure of loans and finance can be completely different though and depending on what you want from your agreement, you may be better suited to one over the other. This article looks at both in more detail and helps you to decide which is right for your circumstances.

What is a car loan?

A car loan is when a lender agrees to give you money and deposits it straight into your bank account. You then make monthly repayments with interest till the end of the agreement. The loan isn’t secured against the vehicle, and you will buy the car just like a cash buyer would so the ownership lies with you from the start. To get the best interest rate on a personal loan, you should have a good or excellent credit score first.

Advantages of personal loans

Usually benefit from fixed interest rates so your APR won’t change.
Can be spread over 1-7 years.
Easy to arrange.
A simple and easy-to-understand way to get a car.
You own the car from the start of the agreement.
Buy from a dealer or private seller.

Disadvantages of personal loans

Monthly payments can be higher than car finance options.
You are responsible for all repairs and maintenance.
Can be hard to obtain if you have less than perfect credit.

Types of car finance:

Car finance is another great way to get a car and pay for it over a term that suits you. Personal loans only come in one form, but car finance can include both hire purchases and personal contract purchase deals. It can be worth taking some time to compare car financing to see which would be the most suitable to your circumstances.

How does hire purchase work?

Hire purchase is a form of secured loan which means the lender owns the car throughout your finance term. You can spread the value of your chosen car into equal monthly payments with interest until the end of a HP deal. Hire purchase is really straightforward and there’s only a small option to purchase fee to pay if you wish to keep the vehicle at the end of the agreement.

Advantages of hire purchase finance

Fixed term and fixed interest so your payments won’t change.
You can own the car at the end of the deal.
No mileage charges to pay if you exceed the limit.
Options to pay off the loan early if your circumstances change.
Can be bad-credit friendly as the lender owns the car and can use it as collateral if you fail to pay.

Disadvantages of hire purchase

Interest rates can be higher than other options, especially if you have a bad credit score.
Higher monthly payments as you spread the full cost of the car with interest.
Can be an expensive option for short-term loans.

What is Personal Contract Purchase car finance?

Personal contract purchase is a form of car finance and it’s a secured loan just like a hire purchase. PCP works in a different way though, and you make lower monthly payments as you aren’t spreading the cost of the total loan into equal payments. Instead, a large chunk of the loan is left until the end of the deal in the form of a balloon payment. PCP deals are flexible, and at the end of the deal, you can choose to hand the car back to the dealer, pay the balloon payment and keep the car, or use the value towards another car on a new PCP deal.

Advantages of PCP deals:

Pay lower monthly installments.
Additional options at the end of the deal.
Fixed monthly payments and interest rates.
You don’t need to own the car.
No deposit needed.
Low or no-interest finance deals available.

Disadvantages of PCP finance:

Large balloon payment to pay if you want to keep the car.
Additional charges for exceeding the agreed annual mileage or damaging the vehicle.
Ending your contract early can be expensive.