Popular Car Financing Options Explained

By Paula Marriss

On the forecourt the car of your dreams is gleaming radiantly in the mid afternoon sun, but right now that's not your main priority. What you need to work out first is how you're going to be driving it without paying so much on finance that you won't be able to buy the fuel!

It's tempting when buying a new car just to take the first finance option available that you can afford, rather than looking around for a deal that best suits your needs, but it's well worth the effort to make sure you get the right car finance for you.

There are a number of options to look at when buying a car and which one you choose is very much dependent on your personal circumstances, what you can afford to pay up front, how long you want to be paying back the loan, and what other assets you have.

In this article we're going to be looking at a few of the most popular options for car financing and exploring the relative benefits of each so, if you're sitting comfortably, let's test drive a few options.

An Independent Loan With this option you obtain the money for the car from an independent source (banks, building societies, finance companies, etc.) which essentially makes you a cash buyer as far as the car dealer is concerned.

On the plus side being a cash buyer allows you more room to negotiate with dealers for discounts and extras as you both know how easy it is for you to take your business elsewhere. The added flexibility of being able to buy from anywhere also opens up a new range of possibilities for where you can buy the car.

On the negative side such independent loans are often a lot harder to get than other forms of finance and usually rely on you being a homeowner. You can get both secured and unsecured loans for this purpose and while secured loans are cheaper you might have to put your house up as security.

A Hire Purchase Agreement With this option you pay a deposit and then a fixed amount for a set number of monthly installments. On completion you own the car. Hire purchase agreements are usually only available on new cars.

On the plus side hire purchase agreements are pretty straight forward to understand and the interest rates can often be cheaper than alternative forms of finance.

On the negative side the car remains the lenders property until the agreement ends (when you pay the final installment), so you can't sell the car before then without obtaining their permission to do so. Also, should you fall behind by as little as 2 payments the lender can repossess the car, sell it off and sue you for any outstanding balance.

A Personal Contract Purchase With this option you pay a deposit, a fixed amount of lower monthly installments (up to about 3 years), then a final payment. At the end of the agreement you can either keep the car, hand it back or part exchange it against another one.

On the plus side this type of financing allows you a convenient way of replacing your car every 2 or 3 years. It also allows you to have cheaper monthly payments than other forms of financing.

On the negative side this is one of the most expensive forms of financing a car. As with a hire purchase agreement, you don't own the car until the agreement is over and if you need to get out of the agreement early there can be penalties. Also these agreements generally have mileage restrictions too so if you do more miles than agreed there can be further penalty charges made.

So there you have it, the 3 most popular car financing options explained. As you can see they all have their individual benefits and pitfalls and the one that's right for you is down to your own circumstances. Whichever way to you decide to go, at least you're now a little more informed about the options.

About the author:
Paula Marriss is a financial advisor and editorial contributor at The Money Zone where she writes regular articles on Car Insurance and other Personal Finance topics. To read more please visit http://www.mone y-zone.net/insurance/motor/