When you are buying a car and require financing, you can choose from three options:
Hire Purchase (HP)
With HP car finance you usually pay a non-refundable deposit at the start of the contract and then payments throughout. It’s important to understand, however, that this deposit is part payment on the overall cost of the finance agreement. At the end of an HP contract, you own the car outright.
Personal Contract Purchase (PCP)
With PCP car finance you pay a non-refundable deposit – once again, this is taken as a part payment on the overall cost of the finance agreement – at the start of the contract. You then make monthly payments over the course of the agreement, but in order to keep the car at the end of the contract you’ll need to pay a final lump sum. This is also known as a balloon payment. Alternatively, you can give the car back to the finance provider or buy a new car with a new contract by part-exchanging it.
Rather than signing an HP or PCP agreement to buy your car, another option is to apply for a personal loan from a bank or other financial institution. You can then use the money to buy the car, making monthly repayments plus interest to the provider of the loan. With this method, you’ll be the owner of your car from the outset.
Use a guarantor
One solution to getting car finance if you have a bad credit score or don’t have a strong credit history (for example, if you’ve never had credit before), is to use a guarantor. A guarantor is usually someone that you know well, like a family member or friend, who co-signs the credit agreement. They become jointly liable to pay any finance instalments if you’re unable to for any reason. Some car finance and personal loan providers may allow a guarantor to co-sign a credit agreement.
Getting a guarantor on board isn’t a decision to make lightly, however. Interest rates tend to be higher than if you had a regular personal loan, while any missed repayments not only affect your credit score, but will also appear on your guarantor’s credit report. Finally, there is also an emotional factor involved. Conversations about the finance repayments can put a strain on a relationship.