The handy quick guide to car loans

If you’re thinking of buying a car on finance, there are plenty of options. Each has its pros and cons, of course, and they may not all be available depending on your circumstances.

The golden rule

There’s one simple principle behind all types of loan. Higher risk equals higher cost. Many factors have an impact:

  • Your credit rating – a poor rating may make it hard to get finance, and higher interest rates
  • The term of the loan – longer-term finance incurs more interest
  • The amount you can put down as a deposit
  • Whether you’ll be offering security (the car or other assets).

Offering security or putting down a substantial deposit makes your car loan less risky for a lender, which can cut the cost.

Types of car finance

These are the most popular types of car loans:

  • Hire purchase (HP)

With HP, the lender buys the car and leases it to you. You can expect to pay a deposit – typically 10 per cent – then pay the balance off in regular instalments. At the end of the contract, you may have to make a ‘balloon payment’ covering the remaining value of the car. You then own it.

What you need to know:

    • HP contracts usually range from one to five years. You can often negotiate a repayment schedule to suit your budget
    • Interest rates are normally fixed
    • You don’t own the car until the loan is repaid. The lender can repossess it if you can’t keep up your repayments.

Watch out for contracts that include penalty clauses for early repayment, or don’t allow you to return the car and stop making payments if you get into financial difficulties.

  • Personal lease

With a personal lease, you hire the car from the dealer for a fixed regular payment. You can expect to pay an initial deposit of approximately three months’ lease payments.

What you need to know:

    • Service and maintenance costs are often included – provided you keep within an agreed mileage limit (otherwise you can incur some hefty extra costs)
    • At the end of the contract, you may have the option to buy the car for its residual value, continue to lease it, or simply return it
    • You don’t own the car until it’s paid off, and you may be locked into a lease for several years even if the vehicle no longer meets your needs.

  • Conventional loan

While car dealers often offer finance, it’s wise to shop around. Banks, buildings societies, and many other lenders offer car loans at more competitive rates.

Terms usually range from one to five years. Like any personal loan, interest rates on car finance can be fixed or variable – fixed rates help you budget with certainty, but may come with penalties for early repayment.

At Loan Market Bayside we can give you comprehensive information and guidance to help you choose the most suitable car loan for your specific needs.