Car Loan Guide
What types of loan are available What if I change my mind? Lease Purchase| What types of loan are available | Top |
Depending on what type of car you are thinking of buying, whether you are purchasing the car as a company or private individual, and where you are going to get the car from will determine what type of car loan you need. If you are looking to buy a car from a car dealer, then you may be offered the opportunity to purchase it with a monthly repayment plan, known as a hire purchase agreement. What this means is that you pay the car dealer a deposit, which is a percentage of the total price of the car, after which you agree to make monthly repayments for a period of time (usually 3-5 years) and after you have made the final repayment, ownership of the vehicle transfers from the dealer to you.
The rates offered by car dealers for hire purchase agreements vary a lot, so you should ‘shop around’ for the best deal, as some car dealers and manufacturers have special promotions and offers that have considerably lower rates than corresponding dealers.
Be aware of any additional fees within the hire purchase agreement, such as an ‘option to purchase fee’, and remember that the car does not belong to you until you have made the last hire purchase payment, so you cannot sell it before then. The dealer could also repossess the vehicle if you failed to make the monthly hire purchase payments. In other words, the car acts as the security for the hire purchase agreements.
The good points associated with a hire purchase agreement are, that they use the car you are purchasing as security and not your home, the car is yours once all the repayments are made, and the hire purchase agreement can be ended by returning the car to the dealer you bought it from.
The bad points associated with a hire purchase agreement are, that the interest rates are usually higher than those of conventional loans, you don’t own the car until all the hire purchase repayments have been made, and there are additional fees associated with a hire purchase agreement.
If you are going to buy a car from a private person, hire purchase does not appeal to you, or the car dealership does not offer hire purchase agreements, then the alternative is a personal loan. Now, depending on how much you are prepared to pay for a car, will depend on what type of personal loan you require. If you are considering a Bentley Continental (Oh yes), white with red leather upholstery, then you are going to need a secured loan.
On the other hand, for a small run about, worth around 5000.00 GBP, an unsecured loan may be all you need. Don’t let your heart rule your head, make sure you can afford the repayments, as in the case of a secured loan, you are possibly putting at risk your home. Another point is that if you take out a loan to purchase a car, it is most likely that you will be paying more that the actual value of the car, and when you have finally paid off the loan, in most cases the car will be worth considerably less than when you first bought it.
The major advantages of taking out a personal loan to purchase a car is that the car belongs to you from day one, and you have greater bargaining power when negotiating a deal with the prospective car seller or owner. The major disadvantages of using a personal loan to purchase a car are that during the repayment period of the personal loan, you pay back more than the original value of the car you purchased, and if you took out a secured loan to purchase a car, then you may be putting your home at risk.
| What if I change my mind? | Top |
You are usually allowed two weeks to think things over before the agreement comes into force. However, if you sign the agreement on the dealer’s premises, you don’t get a two-week cooling off period.
If you have purchased the car with a hire purchase agreement, provided you have repaid at least 50% of the credit price back, you can give the car back, but you will lose the payments you have already made. You may also be charged for any repairs that need to be made to the car. If you hand the car back before you have made 50% of the repayments, you will forfeit the car, and still have to pay the rest of the repayments (OUCH!).
Be aware that if you decide to pay off the loan early, or decide to move the loan to another lender, you could be liable for an early redemption charge (a fee for repaying the loan early), always check the small print of any agreement to make sure you are aware of any hidden charges.
| Lease Purchase | Top |
Another option for purchasing a car is to use lease purchase, if you are a company and are VAT registered then you could take out a lease purchase agreement. The monthly repayments are worked out according to the period of time the agreement is in force, the price of the vehicle, and what value it will have at the end of the leasing period. This is usually worked out on the estimated annual mileage that the vehicle is expected to do.
At the conclusion of the lease purchase agreement, the lessee makes a payment to the lease purchase provider of how much the vehicle is worth and then takes ownership of the vehicle.
