Car Finance Explained
We explain what car finance is and how it works
Regardless of whether you’re buying a new or used vehicle, a car is a purchase that many of us are reluctant or unable to make all in one go. To help with this, you’ll often find car retailers like us here at EMG offering car finance agreements. These make buying a car more affordable, often bringing the make and model you’re after within reach.
What is car finance?
A car finance agreement allows you to borrow a large portion of the car’s total cost from a lender, and make a set amount of monthly repayments in order to clear the loan. There are several different types of car finance that you can take out depending on your circumstances and your motoring intentions in the future.
How does car finance work?
In general, a car finance agreement will require you to put down an initial deposit, which is then followed by monthly payments that are based on what you can afford, the length of the term, how much you’re borrowing, and what your options are the end of the term.
What you’re able to do with the car when the payments finish will depend on what kind of agreement you’ve signed - more on that later!
What are the benefits of car finance?
No full lump sum
If handing over the thousands of pounds required to buy a vehicle outright was the only option, it would make car ownership very difficult for many who just haven’t got those sorts of funds available. Car finance means that you can avoid that eye-watering transaction, and instead put down a much more manageable deposit.
You can still get a great car on a small monthly budget
Because of the flexibility available from lenders and retailers alike, getting behind the wheel of a sleek and stylish model that ticks all your boxes is still very much possible. Even if your monthly car budget only has a little bit of wiggle room, it’s still worth exploring what makes and models are available to you.
Build your credit score
Whilst taking out credit to improve your credit score may initially make little sense, it does pay off in the long term. Initially, the agreement is likely to have a negative impact, but over time, regular and prompt repayments go in your favour when it comes to building your score, as you’re proving to future lenders that you’re a trustworthy person to lend to, and unlikely to cause them problems in the future.
What car finance is available?
The most common types of car finance are PCP agreements (Personal Contract Purchase), and HP (Hire Purchase). Below we explore what each of these mean.
What is PCP?
A PCP agreement is the car finance of choice for fans of flexibility. An initial deposit is followed by monthly payments that are generally cheaper than its Hire Purchase counterpart, making it an attractive option for those looking to bring a great car within reasonable reach of their budget.
The benefits of a PCP agreement really shine when it comes to upgrading your car at the end of the term. If you’re often in pursuit of the latest model, PCP allows you to exchange the car for your next model. Alternatively, you can make a final payment (known as a balloon payment) and keep the car, or hand it back with nothing more to pay, providing that it’s in good condition and that you haven’t exceeded the mileage limit.
Talking of mileage limits, that’s something to bear in mind with PCP agreements; one of the factors in deciding what repayments you’ll be making is the mileage limit you agree to, and you’ll need to be careful not to exceed it. Other factors include the deposit you put down, the length of the term, and the expected value of the car at the end of the agreement.
What is HP?
Similar to a Personal Contract Purchase, HP agreements (Hire Purchase) require you to put down an initial deposit and repay the rest of the amount borrowed over a period of time.
However, this agreement does have some significant differences. Whilst the monthly payments are likely to be higher than PCP car finance, at the end of the term on a Hire Purchase agreement you’ll own the car outright, which means you’ve got an asset at the end of it.
HP is definitely for you if you dream of long-term car ownership, and there’s another benefit too: there’s no mileage limit to worry about!
What are the best car finance options for me?
Taking out car finance is a big step, and it’s important to get to grips with the right option for your situation. While monthly payments will differ depending on your circumstances regardless of whether you go for HP or PCP, asking yourself these questions will help you make an informed decision.
How do you approach vehicle ownership?
Do the newest models turn your head, or are you happy to motor on in the same four-wheeled sidekick? Taking your future plans into consideration will help guide you towards the right type of finance for you, as the options available at the end of the term will either make it easier to upgrade or leave you with an asset on your driveway.
What monthly payments can you afford?
Be honest with yourself in terms of what your budget can stretch to, not just now but every month going forward until the end of the term.
How many miles do you cover a year?
Regularly being on the road covering long distances will affect your monthly payments if you take out a PCP agreement, so make sure you accurately calculate the mileage you’re likely to cover if this is the type of car finance you’re interested in.
Finance your next new or used car at EMG in East Anglia
We’re proud to offer a straightforward and transparent car finance process to our customers at EMG, providing them with ways to afford the car of their dreams. If you’re curious about what you could afford, why not browse our selection of new and used cars on our website today?