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An Overview of Car Loans and Finance

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Being probably your second biggest purchase next to a home, buying a car involves careful decision making. If like most of the population, you can’t afford to buy a car in cash, let alone afford a down payment, you need assistance for financing your vehicle. Two main options you have if you want a new car but do not have the cash for upfront payment are car loans and car finance, and here you will discover how they differ from one another.

1. Car Loans

You can apply for conventional car loans through banks or lending institutions. With car loan, you can borrow a huge sum of money which you can use to buy a vehicle outright. With car loan, you can gain full ownership and rights to the vehicle, while you pay back the loan to the lender based on your agreed terms.

Most of the time, car loans are generally cheaper than other financing options, although your credit score should play a major role on your approval and interest rates.

Car loan Methods

Credit card. Like most purchases, you can borrow against your card’s credit limit to pay for the car’s down payment or full price. However, this one can be the most expensive method if you are not able to repay back the loan quickly.

Mortgage top ups. Be careful about this option though, as not every lender allows mortgage top ups and you might risk your home in the process.

Personal car loans. This can either be secured or unsecured. The terms usually last between 5 to 10 years. You have to be very cautious though about missing payments, because you can lose your vehicle or your home (for secured loan) if you default on payments.

2. Car Finance

On the other hand, car finance allows you to drive a car with the help of a car financing company or car dealership. By financing, the company purchases your vehicle of choice and then you will pay them fixed “rental” payments for a duration of 12 to 60 months. Its main difference from traditional car loans is that you don’t legally own the car although it is in your possession.

Types of Car Financing

Hire Purchase. With hire purchase, you are required to make a deposit in order to possess the car, and then you will pay for the remainder of the purchase price over a predetermined period of time at fixed installments. Once the final installment is made, the ownership of the car will then be transferred to you.

Personal Contract Purchase. For a set period of time and at a fixed monthly cost, you will lease the car, after which you will have the option to make a balloon payment and own it outright or return it without having to pay for anything.

Personal Contract Hire. This option allows an individual or company to lease the car for a longer period of time at a fixed cost, which can be cheaper because costs of repairs and services are not included. However, you must agree to specific terms such as total miles travelled.

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