After a home, a car is probably the second most expensive asset many people buy. That’s why it’s critical you consider the best way to fund it.
In identifying a suitable financing model, there’s no one-size-fits-all. As a buyer, you want a superb choice. You can get a car by getting a personal loan from the bank or organizing financing with car finance dealers.
Neither of the two options is better than the other, and the right option depends on multiple factors. Let’s take a look.
Bank financing involves taking a loan to buy a car. The loan could be from the bank, building society, or any other financial provider.
If you choose bank finance, you obtain the quote from your car dealer and secure funding from your bank based on your dealer’s price. You seal the deal with the seller using a letter of commitment from the financing bank.
- It is the cheapest way to own a car on credit.
- It is quick and can be arranged face-to-face, on the internet or, over the phone.
- The price paid is final and covers all costs
- You have to wait for the bank to make the funds available
- Monthly payments to the bank may be higher than other options
Car Dealer’s Financing options
Financing options organized by car dealers include;
- Hire Purchase (HP)
- Personal Contract Hire (PCH); and
- Personal Contract Purchase (PCP).
Hire purchase (HP)
Hire purchase is a way of buying a car by securing a loan against the vehicle. In this case, the client pays an initial down payment and the remaining amount paid out in installments spread over a certain period. You only take the car after payment of the final installment.
This financing model is always very competitive for new cars.
- The process is quick and effortless to manage
- Offers flexible repayment terms
- Some dealers ask low down payment
- You don’t own the car until you make the full payment.
- It is more expensive compared to cash terms
Personal Contract Purchase (PCP)
PCP is similar to hire purchase but has lower monthly installments. The lower monthly payments, however, translate to a higher total amount paid for the car.
Under this financing arrangement, as the car buyer, you don’t need to take out a full loan for the car. You only get an amount equal to the difference between the price of the brand new car and its value at the end of the hire agreement.
At the end of the hire agreement, you have three options, namely;
- You can hand over the car to the dealer without paying anything
- You can make the final payment or balloon payment of the resale price of the vehicle and keep it; or
- You can trade the car in and start all over again.
- Low down payment
- Low month installments
- A choice of what to do at the end of the agreement
- Flexible repayment terms
- You risk additional charges as a client if you exceed the mileage
- You can also pay extra charges in case of excessive wear and tear
- You may end up paying a higher amount than what would you would pay in hire purchase arrangements
- You have to pay the outstanding balance to keep the car
Personal Contract Hire (PCH)
In this arrangement, you pay a fixed amount to the car dealer to use the car. The amount includes maintenance and servicing costs. The dealer expects you to return it at the end of the agreement without exceeding the agreed mileage.
PCH arrangement is more expensive than PCP in terms of monthly installments but offers more flexibility to switch providers.
- The total cost covers servicing and maintenance
- The buyer pays a fixed monthly cost
- The client does not have to worry about the depreciation of the car
- Offers flexible payment terms
- Monthly costs are high due to maintenance and servicing costs
- A higher initial deposit equivalent to three months’ rental
- You don’t own the car
Regardless of the financing model you choose, you need to fully understand the exact amount you will eventually pay in each method. Prepare in advance to have all the information beforehand to ensure you don’t pay high prices in the end.