According to statistics published by the Society of Motor Manufacturers & Traders (SMMT), nearly 200,000 new cars are registered in the UK each month (based on the latest figures for April 2016).
For every sale, of course, money changes hands and many of those sales involve a wide variety of ways of financing a car.
It might be helpful to take a closer look at just some of these:
- traditionally, an unsecured personal loan from your bank is likely to have been one of the favoured ways of raising the funds necessary for the purchase of a car;
- the loan may be paid off in equal monthly instalments – spread over as long as four or five years – and you are able to take immediate ownership of the car you are buying;
- the Consumers’ Association’s Which? magazine advises that personal loans might be offered at reasonably favourable rates of interest, but only if you have a good credit rating. Even then, your financial circumstances are still likely to be taken into account and you may not receive the advertised headline rate of interest published by your bank or other lender;
Hire purchase (HP)
- another conventional way of making a large purchase – such as your car – is by the familiar method of hire purchase;
- just as the term suggests, after you have put down the necessary deposit, this involves a two-stage process – for the first stage, your monthly payment instalments are for the effective hire the vehicle (it continues to be owned by the hire purchase company), and it is only in the second stage, with your final instalment, that the purchase is completed and you become the legal owner;
- a hire purchase agreement may offer the consumer a relatively higher level of protection than, let’s say, an unsecured personal loan;
Personal contract purchase (PCP)
- as with hire purchase, this also involves the payment of an initial deposit;
- in this case, though, your monthly instalments are kept lower by deferring final payment for the car until the end of the contract period;
- the price you pay is the so-called “minimum guaranteed future value” (or “residual value”) calculated by the finance company to be the guaranteed future value of the vehicle when the contract expires;
- upon expiry, you may pay that residual value and take ownership of the vehicle, sell the car privately (in order to raise the funds for your payment of its residual value) or simply hand the vehicle back to the finance company – with no further payment;
- if you choose to return the car, you are free to enter a further personal contract plan for a new vehicle, thus giving you the opportunity of continuing to renew and to drive a new vehicle every two to four years (the typical duration of a PCP).
From just this brief snapshot of some of your finance options, it is clear that your personal credit record is going to be taken into account by any finance company, and in most instances, you are likely to have to find the cash for an initial deposit.
With the help of an independent finance broker, however, you may still secure financing for a car even though you have a poor credit rating – or even Individual Voluntary Arrangements (IVAs) or county court judgments (CCJs) to your name.
Those same finance brokers may also be able to secure finance for your car on a zero deposit basis.