Car Loans

There are four main types of car loans:

Personal Loan
You have the option of either taking out a general personal loan, or a personal loan designed specifically for car purchase. The two are almost identical, but some lenders offer special deals and lower interest rates, if you are using the loan to purchase a car. Also with car loans, some lenders may offer you car-related incentives such as emergency breakdown cover, free motor insurance or special discounts on car accessories. Personal loans normally have lower interest rates than manufacturer schemes or hire purchase loans. Personal loans are available from banks, building societies, and independent finance companies and could be a secured loan or an unsecured loan.

Manufacturers' schemes
You see these types of loans advertised by the car manufacturer and these can be arranged either directly with them or via a local car dealership. Part exchanges on your current vehicle are normally accepted, and the remaining balance is paid through a loan. As with a hire purchase scheme, you will not be the owner of the vehicle until you have repaid the loan in full. If you default on repayments, the car will be repossessed.

Hire purchase (HP)
This sort of car loan is arranged by car dealerships, and in effect it means that you are hiring the car from the dealer until the final payment on the loan has been paid. When the loan has been fully repaid, full ownership of the vehicle is transferred to you.

Personal Contract Purchase (PCP)
If you're buying new and plan to keep the car for no more than three years, then swap it for another new car, you may wish to consider a personal contract purchase plan (PCP). You pay a deposit (up to 20% of total), followed by agreed number of low monthly repayments for up to three years. A final payment must then be made. This is agreed at the start and is known as the Guaranteed Minimum Future Value (GMFV). At the end of the agreement that you can keep the car, hand it back, or part-exchange it for another new car. Usually available for new and nearly new cars only. If you want to keep the car you must pay the GMFV. If you hand it back, you owe nothing more. But you won't have a penny of your deposit or payments refunded. If you part-exchange the car, the dealer will value it. If it's worth more than the GMFV, he'll put that amount towards the deposit on your next car. But if it's worth less you won't have to make up the shortfall. Available from: car dealers, independent finance houses, banks