Things you ought to learn about car finance options

While cash is the most effective means to purchase a car, it is not always plausible due to money problems. Of late, a burgeoning demand has been noticed in car finance deals, with more than 80% of the Irish hinge on car loans in Ireland, but it does not mean that they are the best solution. You must have come across some car dealers assuring that their deals are affordable for subprime borrowers too. Guaranteed lowest prices are what they claim about their deals, but there is more to it than meets the eye.

There are basically for types of financing – a personal loan, hire purchase, personal contract purchase, and leasing. Each of them is aimed at different kinds of borrowers.

• A personal loan is available from a bank and a direct lender that requires you to discharge the debt over a period of five years. You owe the car from the first, but your lender will keep the upper pointer.
• Hire purchase requires an upfront payment worth up to 10% of the market value of the car and the rest payment in fixed monthly instalments over an extended period of time. The identification of the car is repositioned to you at the end of the agreement.
• Personal assurance purchase is a form of hire acquisition, though leasing, where monthly payments are made towards the depreciation of the car. At the end of the term, you are required to make a balloon payment to own the car. Otherwise, you will have to take back the car. In case of exceeded agreed mileage and a car in poor condition, you will have to bear additional charges.
• Leasing is called personal contract hire. At the ending of the agreement, you will have to hand back the car. As is the issue with personal contract assets, leasing is also subject to mileage restrictions. Exceeded mileage will compel you to pay more money.

When there are four types of financing options, you might end up oscillating between them. Choosing the one that suits your financial circumstances can be arduous. You should know which one sounds best for you before starting to look for a car.

Common pitfalls in dealership financing

Car dealership financing is not so cheap. Remember that car dealers are given sales targets, and they would be inclined to close the deal sooner rather than later. The sooner they achieve their target, the better it is.

While car dealers always claim to peruse your credit rating and repaying capacity, you might still be offered a deal beyond your affordability. Here are the common pitfalls:

• Most of the time, car dealers do not explain all the features of hire purchase, personal contract purchase and leasing, which results in choosing a more expensive and wrong financing option.
• Some car dealers will require you to sign up for an expensive deal because it helps them earn higher commissions.
• Not all car dealers make thorough affordability checks. As a result, you struggle to make monthly payments on time.

Personal contract purchase and leasing may sound cheaper

Personal contract purchase and leasing are considered much cheaper than hire purchase and personal loans as the size of monthly instalments is low. Unfortunately, lower monthly instalments do not insinuate that they are less expensive.

Compared to the personal contract purchase, hire purchase and personal loans are much more affordable because you will be able to run your car for a long period of time. Though it is said that your monthly instalments only cover the cost of depreciation in a personal contract purchase, you actually pay the purchase price. Even if you decide to hand back the car, you have already paid towards the purchase price.

If you decide to renew your personal contract purchase and leasing contract, you will find that every year, you pay down a large amount of depreciation, and this is because high prices are set. While personal loans and hire purchases involve a larger deposit, they are considered much more affordable than other financing options.

Which financing option does suit you best?

Here are the situations to make you understand which one suits you best:

You have a decent credit report but no deposit

You should try to look for a more affordable option. As you do not have a deposit, it is recommended that you buy a cheaper car. A secondhand car will better help serve your purpose. Using a personal loan will enable you to sell your car easily and use that money to buy a new car next time. Investing in an inexpensive car will enable you to borrow a small amount of money. As a result, you will find it much easier to manage payments.

Do not ever rely on personal contract purchase and leasing when you do not have a deposit because you will end up paying a lot more than the actual depreciation value.

You have a poor credit rating

You have a poor credit score, and you have no idea of which deal will suit you best. The best option in this situation will be to make a purchase. They offer a longer repayment period compared to auto loans from direct lenders. While longer repayment periods mean the largest interest payment in total, it will enable you to manage payments smoothly. As a fixed monthly instalment will be paid down, you will not have ugly surprises.

A personal loan will not work to your advantage as it will cost you very high interest rates. They are generally aimed at good credit borrowers. At the same time, you will be refused personal contract purchase and leasing, and if somehow you manage to get approval, you will end up paying high interest rates.

You have fluctuating income

In this situation, you cannot qualify for personal loans, and a hire purchase will cost you a lot of interest. In addition, there is a risk of losing your car. Personal contract purchases might be a good idea because monthly payments are lower. Consider using a cheap and second-hand car.

The final statement

There are various types of car finance deals. You must understand how they work and when they best solve your purpose. Knowing these deals inside out will help you make a better decision.