Debt from Car Financing

Debt from Car Financing

Car loans and car financing are two areas where it is very easy to get yourself in debt. Many companies now make it too easy to get a car loan or car financing for those who have bad credit. Some of these lenders will offer car financing to those who have been rejected by mainstream banks. Car finance is available for both new and used cars with the car finance industry itself being highly segmented to offer a wide array of options to the public so that they can apply for approved car financing.

Debt from car financing usually occurs due to:

Car financing for bad credit
Bad credit car loans
Debt with car loans

Car finance companies frequently offer competitive interest rates and flexible payment options that are attractive to the public in the beginning. However, debt problems that come about from car financing are capable of leading to the need for debt solutions and even bankruptcy.

The Types of Car Finance Available

When you have a car in mind that you want and a figure you are willing to pay, you need to decide what type of loan you need and the plans that you have for that car. If you are considering buying a new or used car that you plan to keep for at least four years then a hire purchase or straight loan will end up costing you less in the long run. For those planning to keep a car for no more than three years before swapping it for another new car then a personal contract purchase plan (PCP) is an option that should be considered.

Normal Unsecured Loans

With this method, the borrower gets the money in advance to buy goods outright and then repays the debt in monthly instalments. Unsecured loans are available from building societies, banks and independent finance companies.

- Advantages of an Unsecured Loan

You become effectively a cash buyer
You can buy anywhere and negotiate the best price for you
You own the car from the start

- Disadvantages of an Unsecured Loan

More difficult to obtain than other types of finance
Homeowners with sound finances are preferred by these lenders

Car Hire Purchase

With this method, you pay deposit and then a fixed amount for a specified number of months, after which you own the car. It is available for new and cars that are less than two years old. Older cars are excluded because their value would be too low by the end of the loan period. Car hire purchase is available from car dealers, loan companies and banks.

- Advantages of a Car Hire Purchase

They are straightforward and easy to obtain
They are cheaper than many other types of loans

- Disadvantages of a Car Hire Purchase

You cannot sell the car without permission because the vehicle is property of the lender until the agreement ends.
Those who fall behind by two or more repayments risk the finance company repossessing the car, auctioning it cheaply and then suing to recover anything still owed plus any costs incurred.

Personal Contract Purchase

Under this method, you pay a deposit of up to 20% of the total and then an agreed number of low monthly repayments over a period of up to 3 years. At the outset of a Personal Contract Purchase (PCP), a Guaranteed Minimum Future Value (GMFV) is decided and agreed upon. This GMFV is the final payment of the PCP and afterwards you can choose to part-exchange it for another new car, hand it back or keep it.

This method is available only for new cars or those less than two years old. If you want to keep the car you have to pay the GMFV at the end of the period, however you owe nothing if you hand it back but you won’t get your deposit or payments back, either. When you part-exchange the vehicle, the dealer values it and if it’s worth more than the GMFV they put the amount towards the deposit for your next car. If it’s worth less you do not need to make up the difference. You can get a PCP through banks, car dealers and independent finance houses.

- Advantages of a Personal Contract Purchase

This is a convenient method of funding a new car every two to three years
You can get a lower monthly payment than with other types of finance

- Disadvantages of a Personal Contract Purchase

Those who need to end their agreement early may need to pay a penalty
You will extra if you exceed the agreed annual mileage limit
You must correctly service the car and keep it in good condition
You cannot easily sell the car since it belongs to the finance company until the PCP ends

Trouble from Car Finance Debt

If you are struggling with mounting debt and you need help, consider learning more about Debt Management Plans or if the debt is more severe, an IVA (Individual Voluntary Agreement). It’s worth your while to resolve debt issues while they are small, so don’t wait, seek help today.