When you secure a car on finance, you’re borrowing money in order to pay for your new vehicle. You’ll then repay this loan via a series of pre-agreed monthly instalments.
There are different kinds of car finance that you can secure, and which one is right for you will depend entirely on your circumstances.
The language around loans and finance agreements can be confusing. This article is here to help you differentiate between them and decide what option is best for you.
What are the different types of car finance available?
If you are not a cash buyer, you’ll likely need to get a car finance quote and establish which finance option is best for you.
There are three main types of car finance:
Hire Purchase (HP)
With HP car finance, you’ll have the option of paying an initial deposit followed by a series of pre-determined monthly repayments. Because you will own the car at the end of an HP finance deal, your repayments are likely to be slightly higher than with PCP finance.
Personal Contract Purchase (PCP)
Unlike HP finance, with PCP finance, you don’t own the car at the end of the finance term. Think of it more like a long-term rental. You’ll pay an initial deposit and then a series of monthly repayments. At the end of the deal, you can return the car to the dealer or trade it in for another car. Or you can pay a lump sum in order to own it outright.
Personal Contract Hire (PCH)
The monthly repayments for PCH are lower than either HP or PCP, because you don’t own the car at the end of the finance term and are never its legal owner. You will pay an initial deposit and then return the vehicle to the dealer at the end of the term.
What is a personal loan?
As well as these three main types of car finance, you can secure a personal loan. A personal loan is a loan that allows you to borrow a specific amount of money. They’re available from banks and other lenders, and are unsecured, meaning that you don’t have to put up any other assets (such as your car or your house), in order to secure them. You’ll typically repay a personal loan over a longer period than any of the other finance options, but shorter options are available.
A personal loan can be used to finance a number of things. You can use a personal loan to finance the purchase of a car, but they’re not exclusively designed for this purpose.
If you do choose to use a personal loan to finance a vehicle, you’ll have the advantage of being seen as a ‘cash buyer’ by the dealership. As a result, you shouldn’t face any balloon payment or deposit. It also means that you own the car outright and will be able to sell it as and when you want.
What is a car loan?
A car loan is a type of personal loan and, as its name suggests, it is specifically designed for the purchase of a car (or another vehicle).
As with a personal loan, you will own the car outright with a car loan, and you shouldn’t face a deposit. You just have to budget for the monthly repayments on your car loan.
Is car finance, a personal loan, or a car loan right for you?
Whether a car finance deal, a personal loan, or a car loan is the right option for you will depend upon your circumstances. There are advantages and disadvantages to all three.
There’s also no hard-and-fast rule on which type of finance or loan deal is easier to secure – it will depend on your situation and the lender’s criteria.
With a personal loan and car loan, you own the car, and aren’t subject to any mileage usage. You can also resell the car whenever you want. You just have to ensure that you repay the loan in full and remember not to miss any repayments, which would impact your credit score.
Car finance tends to be more flexible, and you can choose to terminate the agreement early or purchase the car at the end of your term (depending on what option you settle for). That said, you may face mileage or other restrictions on usage.
Get a great car finance deal
If you’ve decided that car finance is the best option for you, My Car Credit is ready and waiting to find you a great deal. We compare finance across our large network of lenders to find deals that are tailored to each buyer’s budget, credit score and other requirements.
You can apply online and get an instant decision on car finance without impacting your credit score. If you have any questions about car finance and personal loans, our team are on hand to talk you through your options, contact us today on firstname.lastname@example.org.
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