Car Finance – How Does It Work?

Purchasing a new car is an exciting prospect, but the price tag can often be daunting. So how does car finance work? It offers a way to spread the cost of your dream vehicle over time. Let’s dive into the world of car finance and explore how it works.

What is car finance?

Car finance is a way to purchase a vehicle by borrowing money from a lender and repaying it in instalments over an agreed period. Instead of paying the full price upfront, you can drive away in your new car while making manageable monthly payments.

Types of car finance

There are several types of car finance available, each with its own pros and cons:

Hire Purchase (HP)

With HP, you pay a deposit followed by fixed monthly payments over an agreed term, typically one to five years. Once you’ve made all the payments, you own the car outright.

Pros:

• You own the vehicle after all payments are made and fixed monthly payments make budgeting easier.

Cons:

• Higher interest rates compared to other options and you don’t own the car until the final payment.

Personal Contract Purchase (PCP)

PCP involves lower monthly payments compared to HP, as you’re not paying off the full value of the car. At the end of the agreement, you have three options: make a final “balloon” payment to own the car, return it, or trade it in for a new vehicle.

Pros:

• Lower monthly payments and flexibility at the end of the contract.

Cons:

• Mileage limits apply and there’s a large final payment if you want to keep the car.

Personal Loan

With a personal loan, you borrow money from a bank or lender to purchase the car outright. You then repay the loan in fixed monthly instalments.

Pros:

• You own the car from the start and there are no mileage restrictions.

Cons:

• Monthly payments may be higher than HP or PCP and interest rates can vary based on your credit score.

How to apply for car finance

Applying for car finance is relatively straightforward. You’ll need to provide:

– Proof of address (e.g., council tax bill or utility bill)

– Valid ID (driving licence or passport)

– Proof of income (usually a few months’ worth of payslips)

Lenders will assess your application based on factors such as your credit history, income, and employment status. A higher credit score typically leads to better deals and a higher chance of approval.

Factors affecting car finance costs

Several factors influence the cost of your car finance:

1. Type of car: The make, model, and age of the vehicle affect the overall cost.
2. Deposit size: A larger deposit usually means lower monthly payments.
3. Contract length: Longer terms may lower monthly payments but increase overall interest paid.
4. Interest rate: This varies based on your credit score and the lender.
5. Final payment: For PCP agreements, the size of the balloon payment at the end.

Remember to factor in additional costs like insurance, road tax, and any arrangement fees when budgeting for your car finance.

Tips for getting the best car finance deal

1. Know your budget: Determine what you can afford monthly and in total over the contract.
2. Compare options: Look at different finance types, contract lengths, and deposit sizes to find the best deal.
3. Check the terms: Understand what happens if you miss payments or want to end the agreement early.
4. Take your time: Don’t feel pressured to sign immediately. Get quotes in writing and review them carefully.

At Chatsbrook Finance, we are committed to helping you find the best car finance deal by offering personalised quotes and expert advice.

How does car finance work with Chatsbrook?

Car finance can be a great way to afford a vehicle that might otherwise be beyond your budget. It’s important to choose a plan that aligns with your financial situation and long-term goals. Consider factors such as how long you plan to keep the car and your estimated mileage.

If you’re uncertain about making regular payments or prefer full ownership from the start, saving up to buy the car outright might be a better option. However, if you like the idea of driving newer models and don’t mind not owning the vehicle, a PCP or leasing agreement could be a more suitable choice.

You can contact us at Chatsbrook to get expert input and discuss your car finance options.