Considering car finance but not sure where to start?

Considering car finance but not sure where to start?

Vendor Finance is here to help.

Buying a car is a big decision, so it’s important to have all the facts straight before you dive in. A car is one of the biggest purchases most people will make in their lifetime, so while it’s exciting to go car shopping, you also need to keep your finances in mind to ensure you make the right decision for you.

When we talk about ‘car finance’, we refer to the process of borrowing money over a set period of time as opposed to buying your car outright with cash in hand. There are several car finance options available within the market – let’s take a look.

Personal Contract Purchase (PCP)

A PCP agreement is a specific type of hire purchase (HP) finance agreement. In fact, it will often be shown on a finance agreement as a hire purchase. The main difference between a PCP and HP agreement, is how the monthly repayments are structured. Under a PCP agreement, there are three core components: 1) the initial deposit, 2) the monthly payments and 3) the final payment. This final payment is often referred to as a Balloon Payment and is associated with a Guaranteed Minimum Future Value (GMFV) and together, they are the real key to how a PCP agreement works.

When you apply for PCP finance, the finance company guarantees that, subject to certain conditions, the value of your car at the end of the agreement will be at least the same as the final balloon payment. At the end of the fixed term, you have to take action to settle the outstanding debt (Balloon payment). You can simply:
• Pay the finance company the final payment and keep the car
• Give the car back under the terms of the GMFV, or
• You can trade in the car against a new car at a dealership, who in turn, pays off the final payment for you

PCPs are appealing because the monthly payments are often lower than a HP or personal loan and you have the option of upgrading to another car and entering into a new contract after a relatively short period of time.

However, PCP agreements do come with some disadvantages to consider as well. Generally, the car must be returned in a specified condition with significant penalties for excessive mileage and more.

Pros

• Monthly payments are often lower than a HP or personal loan
• A newer vehicle can decrease maintenance/running costs
• Option to upgrade to a new car with a new contract

Cons

• You can get locked into an endless PCP cycle
• The terms and conditions are restrictive: e.g. low mileage allowance, full service history and no damage beyond normal wear and tear.
• The penalties incurred for exceeding the T&C’s can be quite substantial
• Once you get into a PCP contract, it can be difficult to get out early

Hire Purchase

Hire purchase is one of the most commonly used forms of car finance. In a traditional hire purchase agreement, you pay off your entire borrowing in equal monthly instalments However, as with PCP, the loan is secured against the vehicle and you don’t own the vehicle until the final payment has been made under the agreement.

Depending on the finance company you use, full finance options may be available to you however a deposit of 10% – 20% of the cost of the car is more typical.

Pros

• Once the final payment is made under the agreement, you own the vehicle. There is no balloon payment.
• The interest rate is fixed throughout the finance term
• Depending on the year of the car, you can tailor the length of the finance agreement to suit your needs
• Easy to get out early, if desired
• No restrictions to servicing or mileage clauses

Cons

• If you do not keep up with the repayments on the loan, the car can be repossessed by the finance company, which in turn can affect your ability to access credit in the future
• Monthly repayments tend to be higher than those seen under a PCP agreement

Unsecured Personal Loan

A personal loan, or an unsecured loan, is supported by your creditworthiness only – no asset required as loan security. It lets you borrow an amount of money over a fixed amount of time which is typically paid directly to you, to use for any purpose – e.g. buying a car, home improvements, etc.

Pros

• Less risky borrowing option for you because there’s no danger of losing any assets if you can no longer repay the debt
• More flexibility can usually be offered than that for secured loans
• You can pay off the loan early, before the end of the loan term
• You can borrow more than the cost of the vehicle, to help with insurance and/or motor tax costs

Cons

• If you do not keep up with the repayments on the loan, it can negatively impact your credit history, which in turn can affect your ability to access credit in the future
• Because unsecured loans are more risky for the lender, interest rates can be higher
• The loan application process can be slower, although many lenders now offer online application options
• Interest rate is typically variable, not fixed, during the term of the loan so your monthly repayments may change in relation to any changes in the variable interest rate.

Making Car Finance Easier

To prepare for applying for car finance and getting your finance approved, there are a few tips and tricks to keep in mind.

Be Prepared
If your salary isn’t paid directly into your bank account, the lender will be unable to verify your income. Be prepared to provide a copy of your payslips for the past 3 months, along with your bank statements, so be sure to have these available!

Keep your bank statements strong
To secure financing, it’s important that your bank statements reflect financial responsibility. Lenders don’t like to see referral fees, returned direct debits, unpaid fees or gambling charges. Ensure you have a healthy running balance in your account at all times and avoid the above fees by ensuring your account does not get overdrawn. This will demonstrate good account management and repayment ability and score big with the lenders.

Maintain good credit history
Any defaults on previous loans or mortgages, are typically reported to the Irish Credit Bureau (ICB) and/or Central Credit Register (CCR), which will have a negative impact on your ability to secure credit. This information usually remains on your credit history report for a period of five years before dropping off. A poor credit history can be automatically declined by most mainstream lenders, and although there are lenders who work with applicants with impaired credit histories, the interest rates offered tend to be much higher.

Car Finance with Vendor Finance
There are many car finance options available, and it’s important you make a choice that suits your personal circumstances. At Vendor Finance, we offer Hire Purchase (HP) finance options, so why not hop over to our website to learn more. It only takes a few moments to fill out our application form and who knows? Once we have your supporting documentation, you could be approved for car finance within a few hours!

If you’ve got more questions, contact our customer service team and we’ll be happy to go over everything you need to know!