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Owning a car is a huge financial commitment, but it's also a necessity for many of us who rely on our car to get to work, take children to school and do the shopping. A car finance loan is simply a way to spread the costs of that big purchase over time, making it more manageable and realistic.
The main reason to consider a car credit loan is if paying the full amount for a car upfront will put you in financial difficulty. Car credit will always be costlier over the long-term than paying for your car upfront, but if paying in one go means you have to borrow for other reasons it may be worth considering car finance.
Car finance is a secured loan. That means that if you fail to keep up your payments the lender may be entitled to repossess your vehicle. However, that also means that the lender has added security, so they can lend to you at a better rate.
There are a variety of car credit loans available. The main one is hire purchase which is fairly straightforward. Under hire purchase you pay an initial fee, then agree a series of monthly payments until the car is paid off. The longer the period you stagger your payments over the cheaper the monthly costs will be, but the greater the overall costs.
A rarer form of car finance is known as personal contract purchase, or PCP, whereby you are given the option of buying the car at the end, or handing it back. If you choose to purchase at the end there will be a final 'balloon' payment which you agree at the beginning and relies on you estimating the value of the car in future.
While PCP can seem like an attractive proposition you should think carefully about how the future value of your car is assessed. If your car is rated as costlier than the actual resale price you will end up overpaying on your loan.
The main thing to look out for when comparing car finance is the APR, or ‘annual percentage rate’. The APR is the interest rate you will be charged for the loan including fees and charges have to pay, so it gives you a clear idea of the overall cost of the loan. The actual overall cost – so how much car finance will cost you over the lifetime of your loan – is also crucial to comparing different types of loan.
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