Buying a car is one of the biggest purchases you’ll make, so it’s important to get it right.
There are three main ways you can get a car – buying it outright, leasing the car, or taking out car finance.
We know it can be confusing trying to figure out which option is best for you, so we’ve compiled a list of pros and cons of car finance, which is fast becoming an increasingly popular option for car buyers.
Pros
Better choice of cars
You don’t have to pay for the car outright, so you’re not limited by what you can save. As car finance doesn’t make the initial dent in your personal finances that paying in full with cash would, you may be able to drive away in a better car than you might be able to save for.
Fewer repair bills
Paying for a car on finance means that you can get a more modern car (either new or used) as you’re spreading the cost over a longer term, and making the payments more manageable. Compared to buying a car outright with cash, you might find that you’re able to afford a more reliable vehicle with finance, saving you more in the long run, as you’d have less risk of running into costly repair bills.
At Arnold Clark, you also have the option to add a Service Plan onto your car finance deal, meaning you can also spread the cost of your servicing and MOT tests over two, three or four years, instead of paying a lump sum in the future.
Convenience
If you visit an Arnold Clark branch, you can find the car you want, speak to a sales executive who can work out a finance plan that suits you and drive away hassle-free – sometimes in the same day. This will save you time, rather than researching and getting approval from third-party lenders.
It can be relatively easy to get accepted for car finance
This depends on what type of finance you choose, but there are lots of options to suit different customers and circumstances.
If you have a poor credit rating, you’re unlikely to be accepted for a personal loan, but alternative finance options could still be open to you. 1
There are lots of different ways to finance your car and at Arnold Clark, we have a panel of 20 lenders to choose from, meaning you have a good chance of finding a deal that suits you. If you inform your sales advisor about your situation when applying for car finance, they’ll be able to offer their expert advice.
You can hand your car in early or get a new one after your term ends
If you love keeping up to date with the newest car releases, PCP is a great way to do that, as you can change your agreement at any time – providing your credit score is OK, you have paid off enough of the Total Amount Payable (usually 50%) and haven’t caused any vehicle damage beyond accepted wear and tear.
If you don’t mind waiting until the end of your term, PCH makes it easy to hand your car back so that you can get a new deal on another car.
If you’ve found yourself in negative equity with your current car finance deal, you can change your car to a more affordable option, provided you have reached a certain stage in your agreement (this is agreed when you take out your finance). However, you should bear in mind that you’ll need to apply for finance again with your new deal, and your options may be more limited after going into negative equity.
Quick to set up
Car finance can be extremely quick to set up. Typically you’ll know if you’ve been accepted for car finance the same day you apply for it. If you’re applying for finance on a new car, this can be even quicker than it would be for used cars. Also, at Arnold Clark, we deal with all the paperwork, taking another step out of the process for you.
APR is set for the duration of your term
The APR you agree to on the day you are accepted for finance is the APR you will pay for the duration of your finance term. There’s no need to worry about rising interest rates, as yours will remain constant.
Cons
Applying for a mortgage and other loans
When applying for a mortgage, your mortgage lender will assess your financial situation, looking at all of your monthly outgoings to see whether or not you can afford it. Things like credit card bills and car loans will be considered.
A car loan would add to your overall debt, but there’s also a benefit. Although car finance will affect your affordability score for mortgage and other loan applications, your ability to keep to your monthly repayments will have a positive impact on your credit score.
As with any loan, you will probably pay slightly more
Car finance is a loan (with the exception of Personal Contract Hire), so you will probably end up paying more for your car with finance than you would if you bought the car outright with cash. This is because finance companies will add interest to each of your monthly repayments. The rate of interest depends on many different factors, such as your credit score, the general economic climate and the lender’s rates. You can minimise interest by taking your finance out over a shorter term - however, this will increase the size of your monthly payments. Finance taken out over a longer time will mean you pay more interest overall.
Repossession
Again, because you are effectively loaning the vehicle from the finance company (with the exception of personal loans), you could face vehicle repossession if you fail to keep up your monthly repayments. This is because the car still belongs to them until you reach the end of your finance term.
You can reduce the risk of this happening by being realistic about what kind of car you can afford at the start.
If your circumstances change partway through your agreement term, you can contact your finance provider to request a payment holiday or to extend your finance term (if your agreement allows it) to make your payments more manageable.
Remember, you don’t always own the vehicle
While you’re paying off your finance, the car usually still belongs to your finance provider. Depending on which type of finance you have taken out, this may change at the end of your agreement. You have a couple of options, however. With PCP, you can either pay a balloon payment to keep the car, part exchange it for a new one, or hand the car back. With PCH, you either return the car when your contract ends, request an extension of your existing contract by six or 12 months (depending on the leasing company), or you take out a contract on a new one. With HP, you own the car once your final payment has been made. (Assuming you have stuck to your agreement and not broken any of the terms set out at the start.)
Restrictions on use
There are certain circumstances where getting car finance may be a bit tricky. If you’re a taxi driver, for example, finance companies may be reluctant to offer you a deal due to the high mileage you’re likely to accrue and the difficulty in forecasting the vehicle value at the end of the agreement.
If you’re thinking of taking out car finance on behalf of someone else, you will have to alert the finance company, as they will want to know that the person responsible for paying the finance is also responsible for looking after the car. This would dictate who is allowed to be the main driver of the car.
Some finance deals will also have mileage restrictions. These will be agreed at the start of your term, so make sure you’re happy with the mileage set and try not to go over it. If you do, you’ll have to pay additional charges when your agreement ends.
You may also run into restrictions if you take the car outside of the UK. If you wish to drive the car outside the UK for 30 days or more you may need a letter of acceptance from the finance company.
Please note that full terms and conditions apply for any particular finance agreement. This article is designed to provide an overview of some of the common pros and cons relating to car finance. However, it is not in any way an exhaustive list. Your particular circumstances will play an important part in any decision to apply for car finance and you should seek independent advice if you are unsure what this may mean for your credit score and ability to afford any loan repayments.