Hire Purchase
Hire purchase is the simplest form of car finance. You effectively rent the car while making monthly payments, but every time you hand over the cash it contributes to the vehicle eventually becoming your property. Hire purchase through a car dealer is arranged in a very similar way to buying any other goods on credit – while all the calculations, form-filling and signatures are carried out in the dealership, it's a finance company that supplies the cash, and to whom you make your repayments to. Deposits for HP schemes are low – usually no more than 10 per cent, and often a lot less. And the interest rates are fixed while being highly competitive.
Would suit? As HP is secured on the car you're far more likely to get credit than a personal loan. So, if you're worried about being refused finance, HP is for you.
Lease Hire
Lease hire is similar to buying a car on standard finance, except that you never actually own it. You agree a fixed monthly charge to rent the vehicle for a set time period then, at the end, hand the car back. There is a deposit when you first take delivery – usually the first three months' rental charge – but some agreements even factor in servicing costs so you can fix your monthly car costs easily. It is getting more popular too: specialist lease firm Lings Cars has reported visits up 40 per cent in the recession.
Would suit? Motorists who like to change their car on a regular basis or who want to fix their monthly motoring costs because they're on a strict budget.
PCP
A Personal Contract Purchase or PCP is one of the most popular forms of providing car finance, particularly among the dealer network. The actual format to a PCP boasts many similarities to hire purchase or lease hire - and while all the paperwork is carried out in the dealership, it's a finance company that administers the arrangement. There's a deposit to come up with first, followed by monthly payments, in this case usually over three years. However, even with the interest charge these payments are significantly lower than those applicable to HP deals, and as a result at the end of the three years there remains a lump sum still owing on the car. This is normally known as a 'balloon payment' or minimum guaranteed future value (MGFV). At the end of the agreement you're given options as to how you settle this. You can simply pay it off, hand the car back and walk away, or you can trade the car against a new model at the dealership, using the difference between what you owe and the car's value as your deposit.
Would suit? PCPs appeal to those who want to change their car on a regular basis.
Personal Loans
The credit crunch has hit the personal loan market hard. Money is in short supply, and banks are being much choosier about who they lend to – which is bad news for car buyers! The main problem is all the big lenders have been stung by bad debts, so are now looking to reduce their risk – and that means fewer people are getting loans. The average APR – annual percentage rate – has also risen by around two per cent in as many years and only those with the very best credit scores can get these headline offers.
However, it's not all bad news. There are still advantages to opting for a personal loan – not least flexibility. With funds in place, you are not tied to one particular car dealer and are in a far better position to haggle. You will also own the car right away, so you can sell it whenever you want. This is good for those who need flexibility, or who think their circumstances may change.
Would suit? Those with excellent credit records, who are not looking to borrow more than around £15,000. These people can search the internet to find the most competitive interest rates, then walk into dealers and pay cash.
Payment Protection
When times are tough, many car buyers turn to payment protection insurance as a shield against potential money woes. If you're worried you won't be able to meet finance repayments if you were sacked or struck down by an illness, PPI is there to help. The insurance covers your monthly bill – and sometimes a little bit extra on top – should you fall on hard times. The biggest reassurance it offers is the fact you won't default on a loan meaning your credit rating will remain unblemished. Remember, PPI is purely optional and there should be no pressure from the lender to take it out. And you don't have to buy from your finance provider either – there's a large market for PPI and you are well within your rights to shop around.
Would suit? Someone who is risk averse, or works in an industry with the threat of redundancies. If taking out the loan is really stretching things, it's worth considering.
Credit Ratings
Lenders determine how risky a proposition you are from your credit score. It helps them judge your ability to repay the loan before they offer finance. Credit ratings contain all your personal information, including previous addresses, your financial commitments to other lenders and a history of your lending record – including any County Court Judgements from up to six years ago. You can repair your credit rating in several ways. For CCJs and other blemishes against you, pay them off right away. You can also add a 'Notice of Correction' to explain the circumstances behind the bad debt.
To keep your credit rating tip-top, make sure you meet all contractual payments on every one of your accounts. This will mean lenders may consider you for the lower APR rates and will be far more likely to offer you credit. If you want to check your rating you can sign up for free reports online.