Purchasing a car is a big decision. In most cases it is also the second most expensive purchase that a person makes in their lifetime. Despite this many drivers fail to choose the correct type of finance.
Typically, the majority of potential car buyers will spend an average of three months researching and looking round for the car that is right for them. Polls have shown that many people do not even take into consideration shopping around for the car finance deal that is suitable for them.
Personal loans are one of the most popular types of consumer credit. They are typically not secured against the person’s property and can be obtained for a variety of purposes ranging from general shopping to home improvements. Many brokers are offering personal loans without asking too many questions. But there is a flipside to what sometimes seems like a hassle-free loan. The borrowing rate can be very high, especially for customers with a bad credit file. Purpose-specific loans, for example car finance, can offer a lower rate.
Car finance is particularly useful for prospective car buyers who have been refused finance elsewhere or have a bad credit rating. Many people who have a poor credit rating may be refused personal loans to purchase a car or the APR offered with the loan may make the whole deal overly expensive.
One of the main types of car finance offered is Hire Purchase (HP). Dealers are often keen to offer these types of agreements. Hire purchase finance is a loan that is secured against the vehicle. This loan is paid back in installments over a set number of years according to the agreement. With these types of deals the finance is secured against the vehicle which aids people with weaker credit scores ability to get finance. There is less risk for the lender as they can reposes the car (the asset) if the owner stops paying the finance. For those with a good credit score using car finance will allow the purchase of a more expensive vehicle. It will also offer highly competitive rates that will closely match a personal loan.
Contract plans are another type of finance that is worth looking at. Here, the customer pays a deposit, continues to pay monthly installments and at the end of the period plan the customer can either pays the remaining balance (balloon payment) or switches to a new deal or vehicle. So this means the customer can change their car every few years or so. The down side to a contract plan is that the customer will not own the car unless they pay the balloon payment which is often a large payment.
For many people car finance may be a better option than a personal loan. For people with poor credit ratings finance using hire purchase may be the cheapest way to acquire their new car. Those with good credit ratings will have the ability to borrow more money and get a higher specification or a newer car. Many customers with good credit rating will find that a bank can give them the most reasonable loan rate.
This was a guest post from Mary @ Creditplus