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Car finance and car loans

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Car finance and car loans explained

Cardeck.co.uk - Car finance and car loans

In terms of purchases, a vehicle such as a car, is likely to be up there among the top of the most expensive purchases you will ever make in your life, after perhaps a home. Whilst a home is more likely to hold its value over time, a car generally depreciates over its lifetime, meaning the more it is used and the older it gets, the less its worth becomes. Exceptions for certain rare classics or celebrity owned cars may occur, but in general the minute a car drives off the forecourt it starts to lose some of its value. A car has to be insured and is subject to motoring laws throughout its lifetime. It therefore makes sense that the purchase of a car should follow some forethought; it is generally not a light decision to make.

Before making the decision of which car to purchase, you need to sit down and work out your budget and requirements, ensuring you purchase the right car to fit your needs, your wallet and your lifestyle. You should also account for the total cost of the vehicle over the time you will own it. This can be done by gaining insurance costings, tax charges, fuel economy figures and your circumstances, such as annual mileage expectations and so on before deciding on the perfect car for you. Once all this has been taken into consideration you will have an idea of what you are looking for. It is at this point that you will need to ascertain what is affordable to you and think about how you will be paying for the vehicle.

Do you already have some money saved up? If so, this could be used to pay for the car or make a deposit towards the vehicle. If you are going to need credit to finance the car there are a number of options available to you. Time should be taken to weigh up the pros and cons of all of these options before deciding on the best route for you. As with getting a mortgage, the option you choose needs to made with consideration.

We are going to take a detailed look at all of the available options to help you better understand car finance. The car market is large and it can be a little daunting and confusing.

Self Financing

Cardeck.co.uk - Car finance and car loans

This is where you use your own funds to pay for the vehicle. This might be from your savings, an inheritance, a bonus or maybe a scoop of the sweepstakes.

Savings - Do you have some savings set aside? If so, this could be the best way to save yourself some money. Interest rates are quite low at the moment, which means the savings are not earning very much. Any loan or finance agreement you take out will be at a higher rate of interest than the rate you are earning on the savings. You could use the savings to pay for all of the car if you have enough to do so, or to put towards the cost of the car in the form of a deposit. Either way you will be saving yourself money on interest rates.

Putting down a deposit for a car means you will be borrowing a smaller amount of money from the lender. Interest is worked out as a percentage of the money borrowed and usually charged annually as an annual percentage of either the money borrowed, or the amount still remaining, commonly denoted as APR. This means the less the money you have to borrow, the less interest you will pay back, which in turn lowers your monthly payments and the total repayable amount.

Common sense again hints at the fact that if you are using your savings to finance a car you should always keep some money set away for an emergency. As the saying goes 'keep some stashed away for a rainy day'. Try not to empty your savings account for the purchase of the car, it could be something you come to regret later down the line. Cars are generally an expensive thing to own, servicing and maintenance costs could leave you out of pocket. If no savings were there to fall back on how would you pay for these?

Cash - Cash is always the best bargaining chip to net you the best possible deal if you are lucky enough ti have the ability to pay cash for the vehicle, do so. If you had savings set aside that could cover the cost of the car withdrawing it as cash from a bank account could give you a slight advantage with some dealers and sellers as card payments incur a charge for the seller.

It is wise to remember however that credit card purchases, always come with added protection, should there be any unexpected problems with your car later down the line. A way around this may be to use a credit card to pay for some of the cost if the car and then to pay the balance off in full the next time you receive your statement. This avoids interest whilst giving you the card protection. We will look into this further in the credit card section.

Pros

Avoid interest charges by self financing.

No debt.

No risk of losing assets such as your car or home.

You own the car outright.

With self financing, there really are no disadvantages, unless you leave yourself with no savings to fall back on later down the line.

Credit

If you decide to go down the route of obtaining credit to purchase your new car you should first look into all of the available options, their benefits and their pitfalls. It is important to weigh up all the options before deciding on the best one to suit you. Not all options will be available to everyone, so it is always advisable to obtain a copy of your credit report before proceeding so you know where you stand.

Affordability - Before entering into any long term financial agreement you should first work out the affordability, and leave room for unexpected eventualities that may occur later down the line. Remember that whilst taking out a loan over a five year period may keep the repayments down it does not bode well for accurate future planning. Five years is half a decade, a lot can change in that time. You may start a family, lose a job, become unwell etc. Always leave room to manoeuvre within your budget. Taking out car finance which leaves you with very little surplus money each month will in most instances lead to not being able to pay it back, leaving you in debt and depending on the type of agreement entered into could see you lose the car or even your home.

Insurance policies may seem like a sound idea, but make sure you read up on them and assess whether they would pay out in your circumstances.

Credit Reports - Credit reports contain personal information about you such as your name, any previous names, current and previous addresses as well as holding information on any credit agreements you have had in the past. This can also include some utility bills etc. It shows whether payments were made on time for any credit accounts held, if any accounts had defaults (this is when you miss a payment), if you have completely defaulted on any of your accounts, meaning they have been unpaid for a long period of time. They also show IVA's which are an independent voluntary agreement, usually made through a third party to lower the debts owed, allowing the debtor to make one affordable monthly payment which is distributed amongst creditors. Credit reports also reveal any CCJs which are county court judgements lodged by lenders for non payment. They also log the worst kind of entry on a credit record would be a previous bankruptcy.

Defaults, CCJs and bankruptcy will all negatively impact your credit score, making it more difficult to obtain any future credit. Credit can also be harder to obtain if you have not previously had any credit agreements or you are not registered on the electoral roll.

A copy of your credit report can easily be obtained online. In some cases you can get a 30 day free trial to sites such as Experian, Equifax and Call Credit. These are the three largest credit referencing agencies. We would definitely recommend getting a report from each one as they can hold slightly different data on you meaning the scores can differ slightly. Bear in mind that if you sign up to one of the 30 day free trials you will need to call up and cancel it before the trial period ends otherwise you will be charged an ongoing monthly fee for the service.

The benefit of having your credit report in front of you is that you know exactly where you stand. You have before you, your credit score in black and white which you can use to assess your credit strengths and hindrances. It gives you the opportunity to spot any errors logged about your credit history, which happens more often than most people would imagine. If you spot any errors you can contact the relevant companies to try and get them rectified and removed from your credit report. All of this assumes you have got a copy of your credit report beforehand, giving you the time to digest it and fix any inconsistencies before happening along to a dealership or loan provider to apply for finance for your next car.

Every time you are credit checked it is logged on your credit file, an action which lowers your credit score. Knowing your score beforehand could stop you applying for finance or a loan that you realise will not be accepted, thus preventing activity on your credit report that could further damage your financing prospects in your search for a vehicle.

There are options out there for people with all kinds of credit scores, encompassing the good, the poor and even the sub prime. Most people have experienced a hiccup or two in life and may not have been able to afford to keep up payments on things. Honesty is the key and knowledge is power. Make sure you know the facts, including the facts about your circumstances, before proceeding to apply for credit.

Self Financing

This is where you use your own funds to pay for the vehicle. This might be from your savings, an inheritance, a bonus or maybe a scoop of the sweepstakes.

Savings - Do you have some savings set aside? If so, this could be the best way to save yourself some money. Interest rates are quite low at the moment, which means the savings are not earning very much. Any loan or finance agreement you take out will be at a higher rate of interest than the rate you are earning on the savings. You could use the savings to pay for all of the car if you have enough to do so, or to put towards the cost of the car in the form of a deposit. Either way you will be saving yourself money on interest rates.

Putting down a deposit for a car means you will be borrowing a smaller amount of money from the lender. Interest is worked out as a percentage of the money borrowed and usually charged annually as an annual percentage of either the money borrowed, or the amount still remaining, commonly denoted as APR. This means the less the money you have to borrow, the less interest you will pay back, which in turn lowers your monthly payments and the total repayable amount.

Common sense again hints at the fact that if you are using your savings to finance a car you should always keep some money set away for an emergency. As the saying goes 'keep some stashed away

Options available in brief

When looking into car financing, you will notice there are a number of options available to you. Each one has its pros and cons, which is why it is important to decide upon your needs and compare them all before getting involved.

Is it important to you to own the car at the end of the agreement? Perhaps you are more interested in having a new car every few years. Do you have good credit history? Have you considered what will happen in the event you are unable to keep up the repayments on your purchase? All of these things are important to consider beforehand. Such a large decision should not be made on impulse. We have gathered information on the most widely available car financing schemes below so you can arm yourself with the knowledge and weigh up the pros and cons of each type of agreement. Everybody has different needs and desires which is why its great that there are so many options available. Find the one to suit you and there really is no reason why your dream car should not be within your grasp.

When taking out car finance you should always look into all of your available options and undertake research to make sure you are knowledgeable and in control of the car buying process. Research the available insurance policies and see if they are of benefit to you, only take insurance if it is fit for you, some policies will not pay out and could work out to be a waste of time and money. Read all the details and equip yourself so you don't get into the wrong type of agreement. Below we have details of all the options available as well as insurance policies. We cover the pros and cons of each type of agreement to help you chose the right one for you. Before looking at the different finance options available we will explain some of the jargon, so you know exactly what is meant.

APR – Annual Percentage Rate. This is the official rate for borrowing. The APR includes the interest rate as well as any associated fees that are included, showing you an accurate representation of the amount repayable over the term of the loan. It gives you the overall cost of the debt. This makes it easy to compare different loans or credit offers. The interest rate of a loan for example, may be 15%, but the APR might be 18% as it includes all the fees, giving you a true comparison between lenders.

Whilst the APR does include fees such as arrangement fees it does not include anything that is not automatically included with the credit. This means things like PPI are not included in the APR costs and will of course make the loan more expensive.

When taking out any credit you may not necessarily receive the advertised APR rate. This is because everybody is assessed differently based on the amount borrowed and the credit score of the applicant. In most cases when you take out a credit agreement you may see it says representative APR. This means that 51% of the applicants who receive the advertised credit offer--be it a loan or a credit card--MUST receive the advertised rate. The rest of the successful applicants will receive different rates, most probably higher rates.

GMFV – Guaranteed Minimum Future Value. At the beginning of some agreements a GMFV is established based upon figures from a third party, ensuring its fair for all involved. Similar to a balloon payment the GMFV is the figure the car is guaranteed to be worth at the end of the agreement. It is based upon the estimated mileage at the beginning of the agreement. You will be asked to give an estimate the annual mileage you expect to cover, if this mileage is exceeded by the end of the agreement then surcharges would be incurred. It is also subject to a fair wear-and-tear policy being adhered to, meaning a car covered in scratches and dents with a filthy interior upon return would incur a large surcharges. The benefit of a GMFV is that it protects the user by eliminating the risk of unexpected drops in the car market. Dependant on the type of agreement a GMFV may be used as a final payment (the balloon payment) to own the car at the end of the agreed period. Refer to Personal Leasing for further information on this.

PPI – 'Payment Protection Insurance' is an insurance policy designed to protect the policy holder if they are unable to work due to an accident, ill health or unemployment. PPI has received a great deal of bad press over recent years as a large number of PPI policies were mis-sold by providers. Changes are due to come into effect to combat malpractice in the market and govern the selling of PPI policies.

WLC – Whole Life Cost, also known as 'total cost of ownership', generally denoted as TCO, is exactly what it says on the tin. The cost of ownership throughout the time you own the car. It will include running costs, maintenance costs and depreciation which will give the value its expected to be worth once you come to sell on the car or the car comes to the end of its working life.

GAP Insurance – Guaranteed Asset Protection. This is a form of insurance policy that protects against depreciation of your car usually over a three year period.

Residual Value – This is a term you will hear on leasing deals. It is basically the amount the car will be worth at the end of the agreement.

Credit Cards

Cardeck.co.uk - Car finance and car loans

Credit cards are becoming a more and more popular way of making car purchases. As shoppers become more savvy and clued up on all things financial, their plastic friend seems to have a lot more appeal. According to data from What Car,1 in 20 people used their fantastic plastic to purchase their car.

As with most things in life, there is a caveat. The first thing to note is that not all dealerships accept credit cards as a form of payment. Others will accept credit cards, but will have a limit on the plastic finance in place, meaning that usually only a deposit can be paid for via this method, some will however allow you to use the maximum amount on two different credit cards.

A number of credit card providers offer enticing 0% interest rates on purchases for new customers. Some are known to extend interest free credit periods for as long as the first 15 months. We found a few credit cards on the market which currently offer this great rate. Other benefits to using a credit card can include loyalty points, air miles or even cash back depending on the card used.

Credit card purchasing is of course more beneficial for only the short term. If you were to pay off the car purchase over, say, 3 years, you would probably incur higher rates of interest than on other forms of car finance. If you were to buy a used car for £4,995 and pay it all off within the 15 month interest free period you would need to make a minimum payment of £333 a month. It would mean however that no interest would be accrued across the period, so you would only be paying the cost of the car back at £4,995 instead of adding what could potentially be hundreds of pounds' worth of interest to the amount to be repaid. If the payments are affordable and you can get a great interest-free rate with a large enough credit limit, then plastic is your friend and a credit card is definitely the way to go.

As well as the interest-free rates you also get the added protection of the Section 75 clause. This is legal protection which was incorporated into the Consumer Credit Act 1974. It ensures you are not left in a position where you are paying off debt for something that was either not fit for purpose or never received.

The Act states that as part of your credit agreement your credit provider must take equal responsibility as the retailer for the purchases made on your credit card between the value of £100 and £30,000. This means if something was to go wrong with your purchase and it fell within the specified costs of £100-£30,000, such as the retailer went bust before you even received the car, the credit card provider would have to protect you and refund the money.

Important points to note about Section 75

Section 75 applies to MOST but not all credit card agreements. Included are store cards, in-store credit instalment plans and some car finance agreements but NOT hire purchase agreements.

The clause covers individual purchases which cost over £100 and were under £30,000. It does not cover the full price of the bill. So for example, if you were to buy a mobile phone for £95 and a case for it for £10 you would not be covered as neither item totalled more than £100 alone. If however, they came as a package deal for £105 then you would be covered.

Only the primary card holder is covered for purchases they made. Any goods or services bought by the secondary card holder are not covered.

Goods cannot be bought through intermediaries such as PayPal or a travel agent.

The card itself must be used, you cannot make a cash withdrawal from the credit card and expect to be covered, for example.

To be covered under Section 75 you do not have to have paid the full amount of the item on your credit card. As long as the individual cash value for the item was over £100 and under £30,000 you are covered under the act. This means you could pay a deposit or part of the amount on your card and still be covered for the whole price of the item as the law stipulates that you are protected for the whole cost of the item or service. Even if you have since closed your credit card account, you are still able to make a claim under Section 75. The claim has to go to the company that provides the card. That would be the bank, for example, rather than Visa themselves. Make sure you keep both the card receipt and item receipt as some providers are obviously not happy about claims being made under this act and may drag their heels, whilst others will make the process as quick and painless as possible.

If you are taking out a new credit card to finance your car, please bear in mind you may not be accepted or even given a high enough credit limit, so make sure everything on your credit report is accurate before applying. Shop around for the best deals. There may be a few out there offering the same introductory interest rate, but check out the rate you will receive thereafter as well as any additional perks such as loyalty points or cash back. Choose the one that best rewards you, taking one with reward points is no good unless you participate in the reward scheme associated for example.

As mentioned in the savings section, if you have savings set aside, you can make the purchase on your credit card or even part of it and pay off the balance in full as soon as you receive the bill. This will give you the full protection of Section 75 and as it is paid off on receipt of the bill you will not incur any interest.

Pros

Section 75 protection

0% interest rates on new card or if paid off in full on receipt of bill.

Some cards offer reward schemes.

Cons

If applying for a new credit card you are entering the unknown. You will not know the credit limit available or whether or not you will be accepted.

You need to pay it all off within the interest-free period.

Credit limits large enough will only be available as an option to those with a better credit rating.

Hire Purchase

Cardeck.co.uk - Car finance and car loans

This is a type of secured loan. In terms of car purchases the loan is secured against the car, meaning that the car belongs to the finance company until the balance and any option to purchase fees have been settled.

Hire purchase is a quick and simple way of financing a car. The car loan is secured against the car itself, which means if you fail to keep up the repayments on the loan the car can be repossessed. With an HP agreement the car belongs to the finance company until the final payment has been made along with any option to purchase fees if they apply. Hire purchase financing is usually competitive for new cars but can be less so on used cars.

The monthly repayments on a hire purchase agreement are worked out on the amount of deposit initially paid, the cost of the car and the interest over the period of the loan. For example, if the car cost £3,790 and you paid a 10% deposit of £379 you would owe £3,411. Interest would then be added at the set rate along with any fees, giving you the APR This would then be divided over the term of the loan for example 3 years giving you the monthly payments.. Hire purchase agreements can give you anywhere between 12 and 60 months to repay the loan. The higher the deposit paid the lower the monthly instalments will be and likewise the less the interest will be incurred on the loan. Although deposits are typically at least 10% of the vehicle's cost, some providers offer this type of loan without any deposit.

As the car does not actually belong to you until the hire purchase has been settled you cannot sell the car until the agreement has been satisfied with the finance provider. Some people however do still sell cars on hire purchase schemes with outstanding payments due on the vehicles. While the law protects private buyers who were unaware of the outstanding HP on the car, it is advisable to always get a HPI check done on a car before purchasing it. In the instance that a car was sold with outstanding HP on it the finance company should take legal action against the seller and not the unknowing buyer, as they were the ones that entered into the agreement.

Pros

Quick and simple to arrange.

Low deposit.

Fixed rate interest.

Allows you to finance a car that you wouldn't be able to buy outright.

Flexible repayment terms between 12-60 months.

Can be settled at any time.

Cons

You do not own the car until the agreement has been fully settled.

You cannot sell the car until the finance has been paid in full.

The car can be repossessed if repayments are not met.

Is is usually more expensive than other types of agreements such as personal loans and PCH.

Personal Loan

Cardeck.co.uk - Car finance and car loans

For those with a good credit score a personal loan is the best option. This is because they generally offer the lowest rates of interest. When it comes to personal loans you can shop around online, with banks,building societies and loan companies to find the best deal by comparing the APR they each offer. Again, the APR may differ from that advertised, but it is a good starting point for comparison. In some cases it may work out better to take a slightly higher loan as loans over a certain amount, usually incur a much lower rate of interest. This will obviously be of no benefit if you had to take a couple of thousand pounds more than required, but for the sake of £500, for example, you could actually end up better off.

When taking out a personal loan, there will be two options available to you. One is a secured loan while the other is an unsecured loan. Secured loans are only available to people with fixed assets, predominantly those that own their own homes.

Secured loans are secured against the value of your home. This means that if you do not keep up the repayments, your home is at risk of being seized. The benefit of a secured loan is that the APR is usually considerably lower as the lender feels there is less risk involved. If you are considering taking out a secured loan sit down and work out how you would keep up the repayments in the event of unforeseen circumstances such as long term sickness or redundancy. An insurance policy may be the best way to go, but make sure you read all the small print to check it is fit for you.

Unsecured loans will have a slightly higher APR, but you are safe in the knowledge that your home is not affected in the event of any unforeseen circumstances which might prevent you from being able to keep up the repayments. This type of loan is generally only offered to people with a good credit history, as the lender would have to go down the debt collection route in the event of non payment.

Pros

Usually better APR rates than other forms of car loans.

The loan is not secured against the car.

No deposit required to obtain the loan.

Allows you to finance a car that you wouldn't be able to buy outright.

Flexible repayment terms between 12-60 months.

Cons

Generally, only available to those with good credit scores.

Secured loans are secured against an asset such as a home, which will be at risk if the payments are not made up to date.

Personal Contract Hire (Personal Leasing)

Cardeck.co.uk - Car finance and car loans

Personal contract hire is fast becoming a very popular way for people to acquire a new car. Often referred to as leasing, as the car is only leased to you over a set period of time and is returned at the end of the agreement.

The payments for personal contract hire are based on the difference between the retail price of the car at the time the agreement is started and the residual value, which is the amount the car is estimated to be worth at the end of the agreement. This is where the GMFV(Guaranteed Minimum Future Value) comes in. So for example the car may cost £14,995 new. You estimate that you will cover 10,000 miles a year over the 3 years that you have the car (30,000 miles in total). The value of the car at the end of the term will be worked out from this information. Depreciation could be say £10,450 over the 3 years, leaving the car to be worth £4,545 at the end of the agreement. Providing the mileage is not exceeded and the car is returned in a good condition, the finance would be worked out on the depreciation of £10,450 plus any interest and fees.

When you get a car through personal contract hire it usually includes the cost of the road tax for the vehicle over the period you own it. Maintenance packages can also be added to the agreement to cover the cost of any scheduled servicing, remedial repair work, tyres, batteries and exhausts.

Leasing is a brilliant way to enjoy the whole of a vehicle while only paying for part of it. You are technically only paying the depreciation cost of the vehicle for the period you are using it plus the interest. Many car leasing companies buy in such volume that their vehicles are cheaper, meaning savings can be passed onto you as a customer.

As luxury cars depreciate slower than other cars they make the ideal car for this type of agreement. Cars such as BMW, Audi and Mercedes are all excellent cars to consider for this method of obtaining a car.

Pros

The initial deposit is generally small.

There is no risk of residual value loss.

Translates into low cost fixed motoring costs.

Instalments are usually lower.

Return or upgrade is possible at the end of the contract.

You get the use of a car that would otherwise be financially out of your reach.

There is no risk of trying to sell the vehicle on or dispose of it when you have finished with it.

Cons

You never actually own the vehicle.

You need to have a fully comprehensive insurance policy on the car.

Any changes to VAT will affect the monthly payments you have to make on the car.

If you go over the estimated/agreed mileage, this can result in more expense for you.

The car has to be returned in a good condition, adhering to the fair wear and tear policy of the lease company.

Personal Contract Purchase

This is the same as Personal Contract Hire, except at the end of the agreement you are given the option to purchase the car, by paying a balloon payment which will have been established at the start of the agreement. The balloon payment is based on the GMFV. At the end of the term you can choose to pay the balloon payment or return the car to the leasing company.

The pros and cons of entering into this type of agreement are pretty much the same as for PCH. They will obviously differ if you chose the option to purchase the vehicle at the end of the agreement, though.

Pros

The initial deposit is generally small.

Translates into low cost fixed motoring costs.

Instalments are usually lower.

You get the use of a car that would otherwise be financially out of your reach.

Cons

You need to have a fully comprehensive insurance policy on the car.

Any changes to VAT will affect the monthly payments you have to make on the car.

The final payment to own the car will be a large chunk usually a few thousand pounds, which is a lot to pay in one go.

Flat Rate Loans

A flat rate loan may be used by car dealers to make the interest rates look considerably more attractive to prospective buyers. If the letters APR do not follow the rate of interest, then you should be cautious. All agreements legally have to show the cost of APR so the dealer should be able to give you this information upon request.

With a flat rate loan, the interest is worked out on the amount of money borrowed at the beginning of the agreement. For example, you might borrow £5,000 at a rate of 6%. The total amount of interest on this loan works out at £1,500 which is equivalent to 12% APR.

Flat rate loans are used to make the interest rate look more appealing. Often this lulls prospective buyers into a false sense of security. Always get the APR rates before signing so you can compare it to other offers available on the market.

Pros

Simple and easy to work out the interest charged.

Cons

Can be misleading as the interest rate is worked out differently and won't correspond to the true APR rates.

For people with bad credit, obtaining car finance can be more difficult. This is because the lenders are taking more of a risk, knowing there is a history of defaults or non payment of previous debts. There are a number of lenders that specialise in this field, offering credit to people with lower credit scores. It is important to remember that the rate of interest charged on bad credit car loans is likely to be a lot higher.

If you have had trouble obtaining credit then obtaining a credit report should definitely be the first port of call. This will show you exactly why your score is low. It could be due to missed payments, defaults or CCJs. It could also be because you have not had much credit in the past.

Once you have copies of your credit reports you can see if there is any incorrect information displayed on them. If there is you should be able to contact the credit reference agencies. Usually they provide letter templates you can use to get the error rectified and removed. Removing any errors will help to improve your credit score. Another thing that will help to improve your credit score is registering yourself on the electoral role. Lenders use this to try and prevent the risk of identity fraud. If you have a low score due to not having had credit in the past, then it is worth your while to ensure you register yourself on the electoral role. It may also be of benefit to try and get a credit card and demonstrate that you can make payments. If the balance is paid off in full each month you should avoid interest charges.

Bad Credit Car Leasing

This works in the same way as a normal contract hire plan. A deposit may be required in advance and then monthly payments over the duration of the contract. At the end of the term which is usually between three and five years the car will be returned to the company you took the agreement through and you could get another one.

Bad credit car leasing is subject to a fair wear and tear policy and an annual mileage limit the same as a leasing plan for people with good credit would be. If mileage limits are exceeded or the car is returned in a condition outside of the pre agreed fair wear and tear policy then extra charges will apply.

The companies that specialise in bad credit contract hire are taking more of a risk when leasing the cars out, the interest is therefore typically at a higher rate than normal personal contract hire deals. The cars leased are usually under a year old.

Leasing is a good way of being able to drive a car that would usually be financially unobtainable. It is perfect for people that don't mind never physically owning a car, and like to change their car every few years. It's a bit like renting a home in a way, some people feel they are throwing money down the drain while others are happy to do so.

As with all bad credit car loans and options keeping up the repayments for your vehicle will help to improve your credit score and demonstrate that you are now able to pay and manage your finances.

Pros

The initial deposit is generally small.

There is no risk of residual value loss.

Translates into low cost fixed motoring costs.

Instalments are usually lower.

Return or upgrade is possible at the end of the contract.

You get the use of a car that would otherwise be financially out of your reach.

There is no risk of trying to sell the vehicle on or dispose of it when you have finished with it.

Cons

You never actually own the vehicle.

You need to have a fully comprehensive insurance policy on the car.

Any changes to VAT will affect the monthly payments you have to make on the car.

If you go over the estimated/agreed mileage, this can result in more expense for you.

The car has to be returned in a good condition, adhering to the fair wear and tear policy of the lease company.

Guaranteed Car Finance

For those with adverse credit on their files this may be the best chance of obtaining car finance. It is sometimes referred to as pay as you go car finance. As long as you can demonstrate that you can afford to make the payments on the car the lender will grant finance on the condition a device is fitted to the vehicle prior to its sale. This device comes with a keypad. Once payments are made monthly the lender sends over a code to enter into the keypad to keep the car running, hence the name pay as you go car finance. If payments are not made in accordance with the agreement the device will alert you by beeping for a few seconds when you put the key in the ignition or remove it. After a number of days of non payment the device will immobilise the car until the payment is received and the code to show that you have paid is entered into the keypad.

This method allows people with defaults, CCJs and even those previously bankrupt to obtain car finance. They also consider people on benefits or those who are retired as long as the payments are affordable to them. This can be assessed by viewing bank statements and pay slips from the last few months.

Generally the APR on this type of finance will be quite high. This is because of the risk involved for the lender. Maintaining the payments across the length of the agreement will improve your credit history, though, which means that next time you apply for finance or credit for a car your chances of getting accepted are vastly improved.

Pros

People with very poor credit ratings can finance a car.

Unemployed or retired people can finance a car as long as they can afford the payments.

If you forget to make a payment the device will beep alerting you to the fact that you missed a payment.

Improves your credit rating if payments are met.

Cons

The APR will be a lot higher than credit agreements for people with a good credit history.

If you cannot afford to keep up the payments the car will immobilise meaning you cannot drive it.

It could be potentially embarrassing with passengers in the car if the immobiliser starts beeping as the noise is very loud.

Some people have claimed that if the car suffers some sort of electrical fault the immobiliser is triggered meaning you cannot start the car.

Car Finance on Comparison Sites

Comparison sites are everywhere at the moment and can be used to save money on a number of services available, most commonly insurance and financial deals. There are a number of online comparison sites where you can compare different car loan products available to you. They can help you to get the best value for money.

Money supermarket was extremely simple to use, select compare loans, chose what it's for, in this case car finance, how much you would like to borrow and for how long. It then asks if you own a home and for your credit rating giving you the choices of good, fair, poor or not sure. After entering your email address you are presented with a number of loans, the type of loan they are monthly payments are shown along with APR rates etc.

Confused.com was less comprehensive it simply asks how much money you require and how long you want to borrow the money for. It then gives you a list of loans and their representative APR, monthly repayments etc.

Compare The Market, this one doesn't specifically have a section to click car finance, but offers a loan comparison tool. It asks how much you want and also gives the option for a monthly budget as well as the length of time you wish to paying the loan back.

Out of these top three comparison sites the best one seems to be money supermarket, whilst still remaining short and simple it gets enough information to be able to offer you a more accurate representation of the products available to you as an individual.

GAP Insurance

GAP stands for Guaranteed Asset Protection. It is a form of insurance policy that is designed to protect purchasers from depreciation on their car in the event that it is written off due to theft, fire or an accident where your insurance company deems it to be a total write off or unrecoverable. In this instance the insurance company would only offer a payout based on the 'book price' for your model of car based on the age and mileage at the time of the write off.

New cars lose on average 40% of their value within the first year of their life. This increases to 60% after 3 years, according to figures from the AA. The older a car becomes and the more miles it has covered the more it depreciates. This means that the insurance payout you receive for your car could be considerably lower than the price you paid for it. This could be a massive blow on top of the inconvenience experienced of loosing your car, especially if the car had outstanding finance or was on a contract hire agreement, as you could end up loosing your car and owing the finance provider money on top! There are a few different types of GAP cover. We take a look at them all below:

Return To Value Insurance

This type of cover is arguably the most valuable of the GAP cover insurance types. It pays out the difference between your insurance company's settlement price and the 'book value' of the car at the time you originally purchased it. Simply put, it pays out the amount the car has depreciated if the car is a total loss. This type of cover is available to take out on new and used cars bought both privately or through a dealership.

So for example, you buy a new car for £15,495 you have an accident and the car is a total write off. Your insurance company takes the mileage and obtains the book price the car is worth at the time the accident occurs for example £9,850. That's a loss of £5,645. The GAP insurance would pay out what the cars book price was when you purchased it. You may have got a good saving on the price new which would be a bonus as you could receive a little more than the price actually paid.

Return To Invoice Insurance

This level of cover pays out the difference between the original price paid for the vehicle and the payout from the insurance company. To qualify for this the car generally has to have been purchased from a dealership and cover for the car taken out within 90 days of the purchase date. The car can either be new or used for this type of cover.

So for example the car cost £15,495 the depreciation was £5,645 the GAP cover would pay out the £5,645 to cover the difference.

Finance Shortfall Insurance

This covers the difference between the insurance companies payout and the outstanding finance remaining on the vehicle. To qualify for this type of cover the car usually has to have been bought either new or used from a dealer using the dealers hire purchase/ motor loan scheme. The cover must also be taken out within 90 days of purchase.

Some finance providers offer this insurance as standard with their agreements so it is worth checking with them before purchasing a vehicle.

Vehicle Replacement Insurance

Also known as VRI or new car replacement GAP. This level of cover pays the difference between the insurance companies payout and the cost of a brand new replacement vehicle. This covers any increases in manufacturers' prices. In order to be eligible for this type of cover the car must be new at the beginning of the agreement and you must be the first registered keeper. You need to be careful with this type of cover and read the small print carefully as some providers only cover up to the invoice price not taking into account any increases in prices, meaning you are being sold a return to invoice price policy for more money.

GAP insurance policies are generally over a three year period. It will only pay out if:

The car was a total loss or unrecoverable as deemed by your car insurance provider.

The car insurance policy was fully comprehensive.

The claim was successful and was fully settled by the car insurance provider. Until then you will have to meet any finance repayments that need to be made.

You should always shop around for GAP insurance. Car dealerships work on a commission basis. They do not make that much money on the sale of new cars. The money is made on the add-ons sold. Many GAP insurance policies can be purchased privately for around half the price of the dealerships cover. If you do decide to take cover from a dealership ensure you read the small print as in some cases the cover only provides a replacement through the same dealership.

If the car was financed or on a personal contract plan / leased then GAP insurance is far more worth your while, but if you do have to claim on the policy the money will go to the finance provider leaving you with no car and no payout, but you will not be left in debt, meaning you will simply have to start again.

Pros

It offers peace of mind.

There is less hassle in the event of a total write off.

The cost of a 3 year policy is generally a lot less than the cost of the depreciation.

If the car is financed you could be left owing money and this is what GAP insurance protects you against.

Cons

Risk of paying for nothing

You must have fully comprehensive car insurance to be able to claim on GAP insurance

Any outstanding finance payments must continue to be made until the car insurance company has paid out the settlement.

Most car insurance policies cover a brand new car if the vehicle was brand new at the time of purchase whilst it is under a year old.

PPI

PPI is sometimes known as loan repayment insurance or loan insurance. It is an insurance policy designed to protect the borrower in the event they become unwell and unable to work or lose their job through redundancy etc. It covers the monthly repayments on the loan until the person can return to work, usually for a maximum period of up to twelve months. It could also settle the loan in the event of the unexpected death of the borrower. This would mean the family would not be left liable for the debt as well as coping with the bereavement. PPI is widely sold by credit providers such as banks as well as third party vendors.

Payouts from a PPI claim go directly to the lender and not the person who took out the loan. If the maximum time of twelve months elapses the borrower will have to find other means of keeping up the repayments on their loan.

The small print should always be read with such policies as there are a number of clauses which could render the policy useless as the provider would not pay out under a number of circumstances. This is why there has been so much controversy surrounding PPI policies and the selling of them. It came to light that the number of unsuccessful claims in this area of insurance was unusually high, whilst a survey revealed 40% of people with a PPI policy did not even know they had it. The majority of the policies were sold at the time the loan or credit card was taken out. Some providers were in the habit of adding the policies on without telling people as the commission received for the policy itself often far exceeded the amount of money they made on the interest from the loans.

When PPI policies were included with the loan, interest was also charged on the full amount of the loan and PPI policy, meaning the amount repaid at the end of the agreement was considerably higher.

Many PPI policies may have been mis-sold as the borrowers would never have actually been able to make a claim on them, or were completely unaware they had the policy to start with. This has led to a number of claims against the providers. Loan providers are now in the midst of a scandal having to pay back millions to people who claim to have been mis-sold the policies. Whilst PPI can be very useful, a policy should never be taken out until all the small print has been read and you are sure you could make a claim in the event you needed to.

External Income Protection policies.

Income protection insurance aka permanent health insurance or long-term disability insurance is designed to pay out a percentage of your income on a monthly basis in the event you can no longer work due to illness or disability. As with all types of insurance there are different levels of cover available. Whilst some will pay out if you are unable to work in your current job, others will only pay out if you are unable to work at all.

There is usually a waiting period before you can start claiming on the insurance policy. This would typically be after your company stops paying sick pay or after any other insurance policies have stopped paying out to you. This type of cover protects in the long term paying out until you can either go back to work or retire.

There are a couple of other policies such as critical illness cover, this type of insurance pays out a lump sum in the event you become critically ill. Short term income protection is another type of policy which is similar but will only pay out for a certain period of time, usually between 2 and 5 years and has a more restrictive list of situations it will cover in the event of.

Income protection cover will not pay out in all situations, the main ones which would not be valid are:

In the event of a normal pregnancy.

Any pre existing medical conditions you were aware of before taking the policy out.

Any self inflicted injuries.

Anything that happened as the result of a criminal act.

Alcohol or drug misuse.

Any disabilities which occurred from being involved in war, terrorism, riots or invasion.

If you have a dangerous job you may also not be covered.

Income protection is better suited to those that do not have any savings to fall back on in the event of an unexpected illness or disability. For people with savings, policies like this may never be required and serve as an unnecessary expense. Always weigh up the advantages and disadvantages before deciding whether or not to take out a voluntary insurance policy.

The Small Print

Cardeck.co.uk - Car finance and car loans

Always read the small print! No matter how many times we hear this the reality of reading through page after page after page of terms and conditions is extremely time consuming, not to mention mind-numbingly boring. Credit agreements are no exception with what seems like endless pages of that teeny tiny writing.

Shocking figures showed that just 7% of Brits read the small print online when signing up to products and services. Whilst we could not find relative figures for those signing credit agreements it does demonstrate the reluctance to sit and go through those terms with a fine tooth comb. Whilst many admitted not reading them at all, others professed to scanning them for any key clauses they felt were of importance. The problem with this is they were not paying full attention to everything and did not properly know what they were signing up to. The small print may not seem all that interesting or enticing, with people stating they would rather read the phone book than the terms and conditions of a contract. Yet signing on the dotted line without actually reading exactly what you are agreeing to could cost you big money!

The small print contains information about the contract you are signing, charges and fees, you could incur, information about your rights and responsibilities, information on their right to change rates in line with inflation etc and any fees or charges such as early settlement or late payment fees. You cannot challenge the terms of a contract simply because you didn't know they were there. If you do not read the terms and conditions you will have nobody to blame but yourself should you encounter a problem later down the line. Whilst generally the sales person will cover the main points of a contract, such as interest rates and length of the term prior to you signing it, they cannot cover everything. It would take far too long. This is why you are given the contract to read. How many times have your eyes glazed over whilst the words slipped over your head when a sales person went into legal jargon mode? They go into auto pilot, the words come out quickly and inattentively as it is the millionth time they have gone over this script. They know you do not want to hear it, but they are obliged to tell you. Your mind is inclined not to hear this, so you invariably lose focus of what the salesperson is saying.

Difficulty understanding the terminology is a key reason people put off reading the terms and conditions. In most agreements, there will be a glossary of sorts explaining the jargon. If you still do not understand what something means do not be afraid to ask. After all, you would kick yourself if that one thing you did not quite understand was the one that came back to bite you.

If there is anything you are not happy with in the contract, make it clear. DO NOT sign anything you have doubts about. Nobody is saying the companies are being sneaky with their Terms and & Conditions but unless you have read and fully understood the terms you will have no leg to stand on if the conditions do not turn out to your liking. Knowledge is most definitely power. Make sure you are in the know. We have all heard the phrase 'signing your life away'. The truth of the matter is how many would know whether or not they had done so though?

In Summary

If you have read through all of the available options you will now have a good idea of what suits your needs best. There is no one best option, we as people are all different with different needs and requirements.

If you like to have a brand new car and want to change it every 3-5 years for another brand new car, contract hire is a fantastic option for you.

For the people out there with brilliant credit history, a personal loan or credit card is definitely the way to go.

For those wanting to own the car outright at the end of the agreement, hire purchase would be a better option. Remember everyone is different, you need to make the decision that best fits with you and your lifestyle.

Things to note:

After deciding on the best option for you the best way to get a great deal is to shop around. Remember not to get credit checked until you are happy with the deal being offered to you. Remember that the APR displayed may not be the actual rate you will end up with as credit history amongst other factors will alter the exact rate you receive. By looking at the representative APRs available you can see who is offering the best deals. If you keep going into showrooms and getting credit checked to see the actual rates you will lower your credit score. By the time you find the best deal you could end up being declined. So shop around, get quotes and take your time when looking into everything that is out there. There is no rush; you will be with this car for the duration of the agreement after all.

Always ask lots of questions. Ask the sales person about the deal: is there any insurance included, what happens if a payment is missed etc. Arm yourself with as much knowledge as possible. Also remember to barter. You can always try and get a discount or things thrown in for free. Sales people are working on commission in most instances and DO NOT want to see you walk out of the door.

Plan for the future! This is a critical point. If you are taking an agreement over a long period you should always sit down and think of all eventualities. What if you lose your job? What if you fall in love and a family comes along? What if the car was to completely break down and be unusable 3 years down the line? You need to cover all bases in your decision-making process. However unlikely the scenario may seem now you need to be sure you can keep the repayments up for the entire duration of the agreement. Many a person has gone into a dealership and taken a lovely shiny two-seater sports car on a 5 year leasing deal only to end up with a family two years into the deal and nowhere for the baby to sit! Planning for the future is critical. Impulse buys of this scale generally become a very large regret later down the line. Add-ons - Have you been quoted for a load of add ons such as an insurance policy? Shop around for anything else you feel would be of benefit for you. After all, you are the one that will be paying for it in the long run. The sales person works on commission; however wonderful they are at their job you should always have the time to walk away and think about everything including the extras. Do not get pressured into anything with bluffs like 'this deal is only available now!' Whilst some things may be time-sensitive, you should always consider all the options before signing into an agreement.

Affordability - Before entering into any long term financial agreement you should first work out the affordability, and leave room for unexpected eventualities that may occur later down the line. Remember that whilst taking out a loan over a five year period may keep the repayments down it does not bode well for accurate future planning. Five years is half a decade, a lot can change in that time. You may start a family, lose a job, become unwell etc. Always leave room to manoeuvre within your budget. Taking out car finance which leaves you with very little surplus money each month will in most instances lead to an inability to pay it back later down the line, leaving you in debt and depending on the type of agreement entered into could see you lose the car or even your home.

Insurance policies may seem like a sound idea, but make sure you read up on them and assess whether they would pay out in your circumstances./

Ensure you know the ins and outs of the agreement you enter into. Read that small print, however daunting it seems and never enter into anything you are not completely sure about or happy with.

* The car finance calculator is for illustration purposes only. The interest rate that you receive from your loan provider can vary significantly depending on your personal circumstances.

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