Types of Car Loans
> Interest-Free or 0% Finance Car Loans
Some
lenders advertise interest-free or 0% finance car loans. You’re
required a sizable deposit, which may be as much as 50% of the
car’s
value. These kind of loans are normally only offered for new car
models and restrict the usual leeway you have with your car dealer
for negotiating the final price. In all likelihood, you’ll
be paying the full list price for the car. Also, the repayment
periods are usually set at 12 months. If the agreed term passes
and there
are still repayments left, you’ll be required to pay at a
very high interest rate until the remaining amount is settled completely.
> Bad
Credit Loans
As banks and building societies are generally conservative when
it comes to loans, it can be difficult to borrow money unless
your credit
history is relatively spotless. Or you may have incurred serious
debt problems such as a County Court Judgement or missed mortgage
or rent payments. Each of these instances will be reflected on
your credit history for six years and will affect any loan application
you might make, regardless of your current financial standing.
Fortunately,
there are loan companies that specialise in bad credit car
loans. They will evaluate you for a loan primarily
on the basis
of your present financial situation, not on your credit history.
Your credit rating is still a factor, however, and a bad rating
will mean that you will be assessed as a high risk, resulting
in higher
interest rate charges.
> Car Title Loans
Car title loans are a type of Hire Purchase. The rate of interest
may either be fixed or variable, and are arranged by your
car dealer. There is a required deposit of around 20% of
the car’s value.
The term of the loan is usually between two to three years
of monthly payments.
Repayment periods are generally shorter
compared to other
forms of car loan financing so the interest tends to be
much higher.
Keep
in mind that since this a form of hire purchase, the title
stays with the company and you only receive actual ownership
of the
car upon the final monthly repayment.
> Classic Car
Loans
A number of companies specialise in arranging loans for
historic or classic cards. The loan can also be for the
restoration
of the car, not just for buying it. Classic car loans
are usually secured
against your property and the amount you can borrow is
higher compared to regular car loans (from £1000
to £500,000).
If you opt for an unsecured classic
car loan, you’ll be offered
a lower amount to borrow and the interest rate will
be much higher.
> Used
Car Loans
The APR on used cars will almost always be higher
compared to new cars. However the repayment periods
are usually
much shorter
since
used cars can be significantly less expensive than
new cars. The exceptions to this are rare and classic
cars
which are
always highly
valued, depending on the condition.
Always check whether
your car dealer belongs to a trade body like the Society of
Motor Manufacturers
and Traders
to ensure
that they
comply to motor industry Code of Practice. This
is especially important in the case of purchasing used
cars and you
will want to be certain
that your rights as a consumer are recognized should
problems arise down the road.
> Personal Contract
Purchase
New cars may be bought through a Personal Contract
Purchase (PCP) which is a form of financing organised
by the car
manufacturer or dealer. This will require you
to give a deposit and agree
to a MFGV
or minimum future guaranteed value of the car,
or in other words
the value the dealer estimates the car will be
worth by the end of the contract which is normally
over
a period of two
to three
years.
By the end of your PCP contract you have
two options: You can return the car or you can pay
an amount
equal to the
MFGV and
thereby
receive ownership of the car. Monthly payments
tend to be lower but there
are associated charges. A maintenance warranty
may be required to keep the car close to it’s
original quality. Another condition is that
you sign up for comprehensive insurance. Also,
there
is a
corresponding charge to any amount of mileage
in exceeding the agreed limit for the period
you use the car.
> Refinancing
Car Loans
Just as you may opt to refinance the mortgage
on your home, you can also refinance your
car by switching
to a different
loan
company. When refinancing your car loan,
you need to
first settle your current
car loan with an amount lent to you by a
lender with a lower APR. This can result in significantly
lower
monthly payments
so you
can
pay off your loan sooner and save on overall
cost.
