Purchasing a car can be a taxing and expensive ordeal. Many people often decide to go with second-hand car finance in order to get a car. Whilst it’s not as flashy as purchasing a brand-new car, second-hand car finance is a lot more affordable. I mean at the end of the day you have to see is car finance is worth it to make sure that you aren’t spending money on something you shouldn’t.
The options for where to go from here can often be confusing. This confusion often stems from a lack of transparency from the car dealer, but it is much simpler than it appears at first glance. Understanding the best way to finance your second-hand car is incredibly important to ensure that you’re getting the best deal. You could always self-finance and just buy the car outright, doing this will significantly drain your savings so unless you will have a significant amount left over for emergencies, it is often safer to go with a different method.
Credit rating can be very important for second-hand car finance as a good credit score will broaden your options. A credit score is simply a number used by banks and other institutions to represent how trustworthy you are, it is based on your credit history and includes various financial factors such as debts, payment history, public records and accounts. More information on credit and how to improve your score can be found here.
Types of second-hand car finance
Personal Contract Purchase: With a PCP you don’t actually own the car at the end of the agreement. You pay an initial deposit and several monthly payments, you have the option of fully purchasing the car at the end, but this requires another lump sum payment or a balloon payment as it is sometimes called. The Monthly payment is based on a number of factors including:
- Size of an initial payment
- Interest rate
- The expected value of the car at the end of the agreement, Guaranteed Minimum Future Value. This will be considerably cheaper with second-hand cars.
The contract agreed upon with the dealer will usually include various conditions such as a maximum number of miles that can be driven, violation of these terms as well as damage to the car beyond basic wear and tear will result in fines. While this method can be significantly cheaper than Hire Purchase, the penalties that you can incur could negate these savings, additionally, you don’t actually own the car at the end which could be a good or a bad thing depending on your circumstances.
Hire Purchase is quite similar to PCP but with a few notable differences. You still pay an initial down payment followed up by multiple monthly payments, but there are no optional large payments at the end. Additionally, after the final payment, you own the car and don’t have to worry about any additional costs with the dealer and subsequently the contracts don’t include any additional stipulations like mileage. You have a lot of freedom for contract length and don’t have to worry about any fines during the agreement, but these can end up being significantly more expensive than other methods.
Leasing (or Personal Contract Hire) is a form of long-term car hire. Unlike Personal Contract Purchase you are not given an opportunity to outright purchase the car at the end of the agreement, however, you do get to rent the car for far longer. It comes with all the penalties and conditions of PCP. These contracts are also quite long so it’s important that you make sure you’ll be able to make all of the payments. You also need to pass a credit check before you can sign the agreement and you will be required to pay a few months in advance (normally 3). Service charges and car tax are included in the agreement so the only maintenance cost you’ll have to worry about is the fuel. Also, if you wish to end the contract early there is usually an extra cost. More information on leasing can be found here.
This cuts out a lot of the hassle as you purchase the car and own it right away and instead of repaying the dealer you repay the bank that gave you the loan. Owning the car right away gives you a lot of freedoms that other options don’t give you, you don’t have to worry about any penalties for mileage and damage, you can also sell the car later. However, you do need a good credit rating to be able to get the loan, additionally, your credit rating can be negatively affected by the loan itself. You also need to account for interest rates, which are affected by your credit rating and naturally differ between banks.
Conclusion on Used Car Finance
Second-hand car finance doesn’t need to be difficult. By carefully assessing your options and your income/credit you can find the right plan for you. There is no set way that works best for everyone, so it is important to make the right choice.