Whether it’s new white goods for your kitchen, the latest smart phone or electronics item, or even your next car, the option of finance is available on virtually everything! In the automotive world, it’s not only new cars that can be purchased via a finance plan, but used car finance is also an available option.
A reason for its popularity? Convenience. You can head into a dealership, discuss your options, and on the spot, a salesperson can set up a monthly payment plan, while you drive away in your new motor. Equally as convenient is going online to purchase your new set of wheels. Simply find the car you like, apply for finance and within a week, it’ll be delivered to your door.
If this all seems a bit alien, a website like Parkers and Money Saving Expert would be a good place to start! Here, you can get finance advice and a quote, or even find out the value of your vehicle. While the concept of a finance option sounds quite simple, is it too good to be true? Read on as we discuss everything you need to know.
Be wary of APR rates
When it comes to finance, there are a number of different options at your disposal, but we’ll take a look at those a bit later on. Regardless of which method you choose, there’s one thing to be wary of – Annual Percentage Rate (APR) charges.
Before you start the process of considering, or selecting your next car, it’s important to know that the finance cost on used cars can vary more than their cash price. Basically, if you’re short-listing a car based on its price, you could end up spending more on finance.
And the reason for this difference in costs is mainly the interest charges. As we have already mentioned, used car finance is convenient, but with that, comes high interest rates. Let’s look at the new car vs used car debate as an example. If you have an excellent credit rating and look to buy a new car, you could be entitled to a 0% APR deal. But if you look to buy a used car, you could be charged anything between 5-20% APR.
Generally speaking, the APR charge is aligned with your credit rating – so an excellent rating would see you being offered a low APR deal, while a poor credit rating would see your charge soar.
How can I finance a used car?
a) Personal Contract Purchase (PCP)
A PCP plan is a popular way of financing a used car, but that doesn’t mean that it doesn’t come without its complications. With PCP plans, drivers usually pay a deposit, and then monthly payments until the end of the contract. Then, there’s the option of making a lump sum payment (or balloon payment), using any equity to put down as a deposit on their next vehicle via a new PCP deal, or hand the car back.
- b) Hire Purchase (HP)
A HP plan is one that allows the driver to buy the car outright, without having to pay the whole cost upfront, and with no large final payment (like with PCP). The cost is split across a deposit and fixed monthly payments. Once the final instalment is made, you own the vehicle.
Both options are seen as attractive prospects, as they allow drivers to spread payments over a long period of time, usually two or three years, although it could be as many as five years. But if you’re looking for the best deal, it’s important to haggle on the finance terms, not just the best cash price. If you’re buying a new car, the interest rate is usually fixed, but if it’s a used car you’re looking for, you should be able to persuade the dealer to lower the APR. And while you’re looking to negotiate, be sure to ask and see if any deposit contribution finance discount is available. If so, this could dramatically cut the monthly payments.
- Personal loan
If you’re finding the APR rates on car finance schemes too high for your budget, have a look at taking out a personal loan instead. Again, the rates will depend on your credit score, but those with a reasonable credit rating could be offered an APR from as little as 3%, when buying a used car.
Bank loans work the same as HP deals, in that there’s no choice about whether or not you want to buy the car outright – you’re strictly committed to owning the vehicle, meaning, it’s legally yours from the off-set.
If you’re looking to negate APRs completely, then your only option is cash. It could be as a result of a poor credit score, or it could be that you’re not happy with the APR rates you’ve been offered. Either way, spending the cash you could have put on a deposit of a used car, on an older or cheaper car, may be worth considering.
This is all the more prevalent if you’re not looking at a long-term investment. For example, instead of putting down a deposit of £1,500 on car worth £15,000 with an APR of 12.5%, you could just buy a used car for £1,500 outright!