According to Sainsbury’s Bank car buying index, figures collated towards the end of 2015 showed that 53% of those planning to buy a car over the next six months were going to use some form of personal finance to do it. Credit cards and personal loans were among the top types of finance on the list and we have also seen a significant rise in the numbers of us using specialist car finance packages, such as Hire Purchase (HP) and Personal Contract Purchase (PCP). But what is it about buying a car on finance, rather than purchasing outright, that makes this such an attractive option?
For most of us, the primary reason to use finance to purchase a car is the element of flexibility that this introduces. The cost of a car in the UK is steadily rising and could be the same as – or more than – the deposit for a property. This makes it almost impossible for many people to buy a car outright. However, a set of wheels has become crucial for many households, whether as essential transport for a job or ferrying the family around in a way that could never be achieved on public transport. Without the flexibility of being able to spread out payments on a new car – rather than paying in one single lump sum – many of us simply wouldn’t be able to buy a car at all.
Some forms of car finance allow you to put off the decision as to whether or not you really want to own the car and this is a significant draw for many people. If you choose to pay via PCP then once the lease period of 2-3 years comes to an end there is the option to simply give the car back. While PCP does allow for a balloon payment at the end of the lease so that you can own the car if you want to, this is a popular type of finance because the car can also be handed back or part exchanged for another model.
For those who could afford to purchase a car outright, using car finance offers the opportunity to own, and drive, a better model than the one that would be affordable via a single payment. This puts better design and functionality within reach, as well as more space and features – opening up more choice in the auto market to those who may otherwise not be able to access it. For anyone buying a car for the first time as a young driver, finance means the opportunity to drive a new car, rather than being restricted to second hand models that are far cheaper and easier to obtain.
Boosting credit status
Using any form of finance to purchase a car, whether that’s a personal loan or an HP contract helps to boost your credit status. As long as the payments are made regularly and none are missed this type of finance provides a good opportunity to demonstrate the ability to manage credit well and to stick to repayment schedules. This can provide a boost to an existing credit score and also help to create one for those who are new to the credit market.
In the past, car finance was often quite restrictive, limiting a purchaser to buying from a specific dealership, for example, and providing a distinct lack of competition in terms of pricing. However, in 2016 car finance has few restrictions and the variety of different options available means there is a plan for most requirements, whether you need just a small personal loan to top up existing savings or an HP agreement to cover a high cost car that otherwise would be out of reach. While many car finance providers may have trusted partnerships with specific dealerships, which can be useful if you don’t already have one in mind, car buyers have the freedom to choose who you want to buy from.
Options for different buyers
How attractive car finance options are to different people are very dependent on credit score and the variety of different choices means that there is something for everyone. As HP and PCP finance is secured by an asset (the car), they are less problematic to obtain for someone who doesn’t have a great credit score than a personal loan. On the other side of the coin, those who have a great credit score may find they get a better deal on interest with a personal loan as car finance – there are plenty of options for everyone.
Oliver Jones has written for Solution Loans since 2016. His passion for personal finance comes through in the 200+ blog posts he's written since that time. His talent for explaining all things money means he's covered topics as diverse as...Read more about Oliver Jones