Looking for information on the types of car finance loans and mortgage options available for you? Look no further, the demands of life may mean you need a new set of wheels sooner than you can save for it or you may need a bigger house. We have taken the time to detail the types of car finance loans and mortgages best for you.
In this article, we detail the following
- Types of car finance loans and mortgage
- Car finance loans
- Types of car finance loans
- Types of Mortgages
CAR FINANCE LOANS
Car finance is one way to spread the cost of a car over several months or years. However, there are risks and costs involved, so it’s important to do your research and compare offers before taking out credit.
Below are some of the different car finance loans available to you, there are several ways to finance your car with credit. Here are the main ones:
With a personal loan you can get the total amount required to outrightly buy
the car of your choice, the loan is then payed back over a set length of time,
usually at a fixed interest rate.
One advantage of a personal loan is that it’s unsecured, meaning you don’t have to use an asset (such as your car or house) as security. Security is something the lender can forcibly sell to get their money back if you can’t repay them. An unsecured loan means less risk for you, but more risk for the lender, so you may need a good credit score to get approved.
It’s sometimes easier to get approval or a better rate by applying for a loan that’s secured against your car. However, you may lose the car if you can’t keep up with repayments.
With a car hire purchase agreement, you’ll usually put down a deposit to take the car away. You’ll then make monthly payments towards the cost of the car, but you won’t actually own it (or be able to privately sell it) until the final payment has been paid – along with an extra ‘option to purchase’ fee, usually around £100-£200. This is quite different from buying a car with a personal loan,
for example, where you’d buy the car outright at the start of your repayment
What’s more, with a hire purchase agreement your debt is secured against the car so if you stop making your payments, the company may take the car off you to recover the money you still owe.
Note that if you end a hire purchase agreement early, you may have to pay a
penalty fee. Some cars come with a finance option, whereby you’d put down a deposit and pay the remainder in monthly installments. You may need a large deposit for this option, and your monthly payments may be quite high. But the upside is that you shouldn’t have to pay any interest on the debt, as long as you stick to the term of the agreement and make all your payments on time and in full.
When you get a car lease, you don’t ever actually own the vehicle, you just make regular payments for using it. How much you’re charged is usually based on the value of the car, how long you’ll use it for, and an agreed mileage allowance.
You may pay less each month than if you were paying off a car bought on credit, but there may be extra costs involved. For example, if the car’s a bit scuffed up at the end of the lease, you may be charged an ‘excessive wear and tear’ fee.
You’ll probably need fully comprehensive car insurance, or any damage to the vehicle will need to be paid for out of your own pocket when you return it. Some companies may insist you also take out gap insurance, which gives them more protection against damage or theft.
Personal Contract Purchase (PCP)
PCP loans are one of the most common forms of new car finance, but they can
also be one of the most complex. With PCP, you won’t buy the car outright. Instead, you’ll put down a non-refundable deposit towards the vehicle’s price,
and borrow the rest. You’ll then make monthly payments to cover interest and
the cost of depreciation (i.e. what the car loses in value while you have it).
At the end of the contract, you’ll usually have a few options:
- Buy the car outright: you’ll need to pay the value of the car (usually agreed at
the start of your contract) minus your deposit. There may also be an additional fee.
- Trading it in for a replacement with a new PCP contract.
- Returning it: there won’t be anything more to pay, as long as you’ve kept to the terms and the car isn’t damaged.
PCP loans are often used by people who like to change their car regularly. They carry the advantage of being quite flexible, and they usually offer low monthly payments since you’re not paying off the car. However, the interest rates are often higher than other types of loans. You should also read the small print very carefully in particular, watch out for penalty charges for exceeding the mileage allowance, and for damage to the car while you’re using it.
Note that to get approved for a PCP agreement, you’ll usually need a good
credit history, especially for 0% or low APR deals.
A mortgage is a type of loan you can use to buy or refinance a home. Mortgages are also referred to as “mortgage loans.”
Mortgages are a way to buy a home without having all the cash upfront. A mortgage is a necessity if you can’t pay the full cost of a home out of pocket. To qualify for the loan, you must meet certain eligibility requirements. Therefore, a person who gets a mortgage will most likely be someone with a stable and reliable income, a debt-to-income ratio of less than 50%, and a decent credit score (at least 580 for FHA loans or 620 for conventional loans).
Below are the best mortgage loans open to you; let’s find out how they work.
- Tracker Mortgages: A tracker mortgage will usually charge you an interest rate that follows the Bank of England base rate, but usually tracks a few points higher. The base rate is the interest rate at which high street banks borrow money. As it goes up and down your monthly repayments will rise and fall too.
- Discounted Variable Rate Mortgages: A discounted variable rate mortgage is similar to a tracker mortgage except rather than being linked to the Bank of England’s base rate, it’s linked to your lender’s standard variable rate (SVR). The SVR can change at your lender’s discretion and your monthly repayments will go up and down as a result.
- Fixed-rate Mortgages: Fixed rate have an interest rate that stays the same for a set period. It means repayments are the same every month so you’re protected from any rise in interest rates. Deals are typically between two and five years, although it is possible to get a fixed term of up to 10 years or more.
- Standard-variable-rate Mortgages: Each lender has its own standard variable rate (SVR) that it can set at whatever level it wants – meaning that it’s not directly linked to the Bank of England base rate. The average SVR in July 2018 was 4.72%, according to Moneyfacts. This is higher than most mortgage deals currently on the market, so if you’re currently on an SVR, it’s worth shopping around for a new mortgage. Lenders can change their SVR at any time, so if you’re currently on an SVR mortgage, your payments could potentially go up – especially if there are rumors of the Bank of England base rate increasing in the near future. One in five mortgage customers we surveyed in 2019 had an SVR mortgage. Most of these had had their mortgages for more than five years.
- Interest-only and repayment Mortgages: When you take out a mortgage it will either be an interest-free or repayment mortgage, although occasionally people can have a combination. With an interest-only mortgage, you just pay the interest each month, meaning you have to pay off the entire loan at the end of the mortgage term. With a repayment mortgage, which is by far the more common type of mortgage, you’ll pay off a bit of the loan as well as some interest as part of each monthly payment.
- Specialist Mortgages: Sometimes your circumstances will mean that
you need a specific type of mortgage. Types of specialist mortgage
- Bad credit mortgages: if you have black marks on your
credit history, there may still be mortgages available to you – but not
from every lender.
- Mortgages for self-employed buyers: it can sometimes be harder to secure a mortgage if you are self-employed.
- Cashback Mortgages: Some mortgage deals give you cashback
when you take them out. But while the costs of moving can make a wad of cash sound extremely appealing, these deals aren’t always the cheapest once you’ve factored in fees and interest. Make sure you take the total cost into account before choosing a deal.
When looking for car finance options and mortgage loans it is important to be well versed with the different types of car finance loans and mortgages available to you. This article details all you need to know and the best options for you.