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Car Finance Explained at MotorFinance4u
If you're not quite sure where to begin or whether Motor Finance 4 U is the right option for you, then look through the helpful pages below to take the guesswork out of it all.
Car Finance Explained at MotorFinance4u
Let's not get ahead of ourselves but rather start from the very beginning. Car finance includes numerous types of contracts which in essence, allow you to make monthly payments for a selected vehicle. We're not limited to just cars, we can in-fact help you find the right solution on motorbikes, vans, caravans and more. The way it works is by securing the payment on the vehicle meaning the lender will own the vehicle and quite often, the lender will send the money straight to the dealership, you then make payments to the lender. Once the payments on the vehicle have been made in full on the agreement, will you own the vehicle.
Financing a car is a very convenient and accessible way of ownership when you don't necessarily have the cash to pay upfront for your vehicle. Any finance plan should be based on two things, those being your budget and your credit profile so that you're able to attain affordable monthly payments.
Types of Vehicle Finance
Hire Purchase
One of the most common types of finance is hire purchase and you may have even come across it before. Hire purchase is incredibly simple - you hire the vehicle and make monthly payments to the lender until you've paid off the agreed finance at which point, once all payments have been made, the vehicle becomes yours. You may have to pay a small purchase or admin fee at the end of the agreement.
Good for:
- Individuals who don't want to or can't pay for a vehicle in full upfront
- Different people with different ranges of credit ratings (Able to meet the needs of many)
- Individuals who have struggled to get other types of credit such as personal loans
Personal Contract Purchase (PCP)
Not quite as common as hire purchase, but definitely on the way up in popularity. Personal Contract Purchase (PCP) works in a similar way to hire purchase in that you will pay an agreed monthly payment, but at the end of the agreement, rather than simply finalising the purchase of the vehicle, you have the option of handing it back. If you choose to purchase the vehicle, you will have to pay a balloon payment.
The vehicle to which the finance is attached to is given a fixed value at the start of the agreement (called the Guaranteed Future Value). This means you won't get any surprises at the end, enabling you to plan whether you want to buy the vehicle or not.
Good for:
- People who want a lower monthly payment, freeing up more cash for other things.
- People who enjoy changing their vehicle regularly for something different
Conditional Sale
Another finance variation is Conditional Sale which unlike PCP and Hire Purchase (HP), you don't pay a fee at the end of your agreement but simply the monthly instalments. Simply put, the lender owns the vehicle while you're making the monthly payments even though you have possession of the vehicle. Once you've paid off the entire agreed amount, the vehicle ownership is passed onto you with no final balloon payment.
Good for:
- Individuals of all credit ratings/profiles
- People who would rather spread the payments and avoid a large final payment
What else you need to know about getting a car on finance
What is a balloon payment?
A balloon payment is a large one off payment which is required at the end of the finance agreement to purchase the vehicle.
What are the risks of buying a car on finance
With any kind of loan or credit agreement, there are some risks attached however, in the UK, car finance is regulated by the Financial Conduct Authority meaning lenders must abide by responsible lending practices.
The finance agreement is secured on the vehicle which means that if you fail to keep up with the agreed monthly repayments, the lender could repossess the vehicle.
A responsible lender will look at your income and expenditure to make sure that you are indeed able to afford the repayments as with any type of finance, missing payments can end up damaging your credit profile so it's important to get the finance agreement right.
What do these finance terms mean
Here at Motor Finance 4U we try to be clear when we talk about anything and everything related to finance, but we do sometimes have to get quite technical with our terms.
We recommend that you try and do some research into what these technical terms mean as we do sometimes have to use them on our site and contracts. You'll also spot the same technical terms around the web so it really pays for you to be clued up on what these terms all mean. We'll try to keep it simple and straightforward for you and if you do get stuck or aren't fully sure about what something means or how it affects you, please feel free to contact one of the team who will be glad to help.
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