Car finance explained.

There are different types of finance products available in the market for purchasing a car. Your choice of car finance will depend upon a number of factors like your credit score, the duration for which you intend to own the car and the monthly payment that you can afford.

Below you’ll find characteristics of various types of car loan options.

What type of car finance is right for you?

This is the most commonly known type of finance product in which you make an initial down-payment and keep using the car as you repay the loan amount with the decided interest through regular monthly installments. Although the car remains with you and is your responsibility, it’s on a hire agreement with you till the complete loan amount is repaid back. Some advantages of this type of loan are :-

• Monthly installments are fixed.
• You can choose to buy the car or return it at the end.
• All you pay at the end for buying the car is a minimal administration fee that could range from £1-299 or a little more.

Hence, HP is suited for you if :-

• You want to go for fixed repayment installments on a monthly basis.
• You intend to keep the vehicle for a long term.

How hire purchase (HP) works

Illustration of how hire purchase works

PCP or Personal Contract Plan/Purchase. PCP is similar to a Hire Purchase, but with some distinctions. The most important point of difference is that the payment that’s to be made at the end of loan term can be much higher than that in HP. This end-of-term payment is called “Balloon Payment” and it substantially reduces your monthly installments in comparison to HP. Some of the key features of PCP are :-

• You don’t have to be concerned about depreciation of car’s value.
• The monthly installments are lower.
• At the end of the loan, you can choose to return the car or keep it by making a “Balloon Payment”.

With much lower monthly installments, PCP is a cheaper loan option than the conventional HP. It’s a good choice if :-

• You’re looking to change your car after the loan period.
• If you can’t afford large monthly installments.
• If you don’t want the car’s ownership right from the start.


How Personal Control Plans (PCP) works

Illustration of how PCP works

Personal Loan. As the name suggests, this type of loan doesn’t secure your car. You just take the loan from the lender and use the money to buy a car. The loan is then repaid back over a period of time with an interest. Its characteristics are :-

• You own your car from the beginning.
• There are no limitations from the finance company.

You need to have a good combination of the Annual Percentage Rate (APR) and credit score. If you’re looking for a decent consumer protection, it’s better to go with other loan types. To know more about consumer protection, click here. Typically, a personal loan for a car is recommended for you, if :-

• You’re looking to buy and own your car from the start itself.
• You wish to have more flexibility in choosing your car.
• You want to either sell/modify your car without any restrictions from the finance agency.
• Your credit score and APR are good.

How a personal loan works

Illustration of how personal loan works

Fixed Sum or Unsecured Loan. You get the ownership of the car right from the beginning of the loan. You take a fixed amount as loan for a fixed duration at a fixed interest rate. Although you’ve got the possession of the car, you can’t sell it away before the complete loan is repaid. Its unique properties are :-

• It’s different from an overdraft or a personal loan.
• The finance company terms your car as an asset.

As your car is called an asset, you get better support from the financing firm, specially if something happens to your car within the first six months of loan tenure.

This is the right loan option for you if :-

• You like a fixed plan for repaying back.
• You need your car insured as an asset.

How fixed sum loans work

Illustration of how fixed sum loans work

Conditional Sale. In this kind of loan agreement, you get the car with you for use, but the right to repossess the car and its title are with the company till the time, you repay the complete amount. Its characteristics are :-

• A wide range of repayment period is available.
• You can cut down the monthly installments by using optional deposit.
• You don’t have the option of returning the car after the loan amount is repaid back completely.

All you need to do is to select your car and Zuto pays for it. You get the car and you’ll keep paying on a monthly basis. At the end of the payment of complete amount, you don’t have to pay any additional administration fee to keep the car.

You must go for Conditional Sale, if :-

• You’re comfortable in paying fixed monthly installments.
• You wish to keep the car even after the loan is repaid.

How conditional sale works

Illustration of how conditional sale works