Car finance: four crucial questions to ask

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Date: 28 June 2019

A car salesman hands over the keys to a new car

If you’ve been thinking about buying a car on finance, you’ve probably been asking yourself whether it's worth taking on the debt. The truth is, the value (or otherwise) of car finance must be assessed on a case-by-case basis.

That said, actually getting to grips with your car finance options needn’t be difficult. Nor should assessing whether or not car finance is the way to go for you personally.

Narrowing down your options

The term ‘car finance’ is actually quite vague, as there are dozens of different ways a vehicle purchase can be financed. However, a select handful tend to top the table as the most popular.

In terms of determining which one is best for you, here are the four important questions to consider.

1. Who do you want to borrow the money from?

Some car finance deals (personal contract purchase or PCP, hire purchase and so on) will only be on offer from the dealers and/or manufacturers themselves. You won’t typically find these kinds of funding solutions available from banks or specialist lenders.

Though not always the case, you may find the most affordable deals come from third-party lenders, rather than the dealers themselves. In any case, it’s important to consider the market in its entirety, before entering into any agreement.

Borrowing directly from the dealer can be more convenient, but doesn’t always guarantee the best deal on the market.

2. Do you want to own the car now, later or never?

If you'd prefer to take legal ownership of your car the moment you buy it, a personal loan could be the way to go. The vast majority of hire purchase schemes (where you pay for a car in instalments) mean not taking ownership until the agreed repayment term is complete.

With a PCP agreement, ownership of the car at the end of the term is optional. If you want to keep the car, you’ll need to pay an agreed ‘balloon’ payment to take ownership of it. Or you can hand it back to the dealer and walk away.

There may or may not be the opportunity to purchase the vehicle outright at the end of a standard lease, which is more like a temporary rental contract than a sale. Your preferences and priorities in terms of ownership are for you to decide.

3. Can you afford a decent deposit?

Personal loans and specialist vehicle loans are usually the only funding options available that don’t involve a deposit. With PCP, hire purchase and most leasing agreements, deposits are mandatory. If you don’t have the funds, you may be out of contention.

Unsecured personal loans and specialist vehicle loans, by contrast, are issued with no deposit requirement. It’s simply a case of demonstrating your capacity to repay the loan, with a good credit history and a strong current financial status.

4. Can you definitely afford the repayments?

Last but not least, it's essential to carefully assess your ability to meet your contractual obligations. Car finance must always be carefully considered in accordance with overall borrowing costs. This includes interest rates and any other fees levied along the way.

Under the terms of a hire purchase or PCP agreement, late-payment or non-payment may result in the service provider repossessing the vehicle and retaining all payments made up to that point. With a personal loan, the lender’s policies will determine the course of action taken in the event of non-payment.

So is car finance worth it?

The short answer is yes - car finance is absolutely worth it. If you don’t have the funds available to afford the vehicle you need, finance could be the only realistic option.

As with all loans and financial products, the key to making it work lies in carefully considering all available options, understanding your obligations and ensuring you can confidently fulfil them.

Copyright 2019. Featured post made possible by iConquer Ltd

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