Buying A Car On Finance – The Different Options From Hire Purchase To A Car Loan

Buying A Car On Finance – The Different Options From Hire Purchase To A Car Loan

Buying a car can prove to be very expensive. Not everyone is fortunate enough to be able to pay for it outright. Even though you have stashed away some money for your car, it would usually cover only the down payment. The good thing is that you can have your car financed.

Car finance helps you spread the cost of the car over a few years. There are various types of car finance. This blog is aimed at discussing them in detail.

Different types of car financing

Here are the types of car financing:

1.  Auto loans

Auto loans are personal loans. They are available from direct lenders. When you take out a personal loan, you do not need to secure any valuable asset against the loan, as your car itself will serve the purpose of collateral. You are completely free to use your car the way you want, but you cannot sell it unless you have repaid the whole debt.

Here are the features and risks associated with auto loans:

• Auto loans from direct lenders last for three to five years, depending on your repayment capacity.
• Every month, you will pay down a fixed sum of money until the whole debt is settled.
• If you fail to repay your debt, you will lose your car.
• If you want to sell your car during the loan term, you will have to pay off the whole debt first. This will attract early repayment charges too.

You should have a good credit rating to be eligible for car loans from direct lenders. However, it does not insinuate that this leaves out subprime borrowers. In case of a poor credit history, you will have to arrange a larger deposit and pay higher interest.

2. Hire purchase

Hire purchase is dealership financing. This is similar to personal loans for cars from direct lenders. Like them, you will need to pay down at least a 10% deposit. Hire purchase also requires you to pay down the debt in fixed instalments. Your credit score plays a crucial role as car loan interest rates are subject to it. The higher the credit score, the lower the interest rate will be.

Here are the features and risks pertaining to hire purchase:

• Hire purchase does not let you own your car unless you make the final settlement.
• If you fail to repay your debt, you will lose your car. This is because it is secured against it.
• Like personal loans, you can end a hire purchase agreement early, but you will end up paying early repayment fees.

You will not be able to sell your car, as you cannot claim ownership unless you have settled the whole debt.

3.  Personal contract purchase

Personal contract purchase is the most common financing, but it is complex and works differently from other types of financing. When you sign up for a personal contract purchase, your monthly payments do not go towards the sticker price of the car. They would rather cover the depreciating cost.

Here are the features and risks about personal contract purchase:

• Monthly payments cover depreciation and interest, and hence they are very small.
• Like auto loans and hire purchase, personal contract purchase also requires you to pay down a deposit. The minimum down payment is 10%. Sometimes, it can be up to 15%.
• In order to apply for a personal contract purchase, you will need a good credit score.
• At the end of the contract, you will have a few options to choose from:
• You can purchase a car outright by making the balloon payment, which is the original value of the car at the start of the agreement minus the upfront payment. This option will cost you some additional fees, too.
• You can trade it in for a new car. This will renew your personal contract purchase agreement.
• You can simply return it. You do not have to pay as long as you have not exceeded the recommended mileage.

Personal contract purchase is generally ideal for those who want to renew their cars within a short period. This kind of financing will cost you a lot of money if you decide to own it at the end of the month. This is because you will have to pay the original price of the car even though you have paid the depreciation cost, which is the difference between the original value and the salvage value of the car.

Although monthly payments will not be as large as compared to hire purchase and auto loans, interest rates will still be higher. It is recommended that you carefully read the fine print. Make sure that you are well aware of the penalties that will be imposed in case of extra mileage and damage to the car.

4.  Leasing

Leasing is an ideal option for those who do not want to own a car. Until your lease agreement comes to an end, you will be responsible for making regular payments. The size of monthly payments depends on the value of a car, mileage allowance and the lease period.

It is worth noting that you will need comprehensive insurance in case any damage happens to the car. At the time of returning the car, you will have to pay for any damage out of your pocket.

The final word

There are various options of car finance in Ireland, but each of them has its own upsides and downsides. You should carefully understand your needs before deciding on the financing option.

For instance, a personal contract purchase is an ideal option when you do not want to own a car, and you often replace your cars. However, if you are planning to own a car, auto loans from direct lenders will be the best bet.

If you are still confused about the financing options available to you, you should consider seeking some expert advice. Make sure that you do not choose the wrong financing option for you, as it could affect your finances.