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UK Mortgages & Loans -> Car Loans

Owning a car nowadays is a necessity in the fast moving world, though to buy one a borrower will need to understand that now and then their savings could not cover its costs.

At any time someone decides to buy a car they must be prepared to pay out a lot of money all depending on what model and make the car is that they want to buy. More often than not they will need to obtain a loan in order to do this.

When a borrower looks on the UK market for a car loan, they will find that have a number of different choices. They can look at the different schemes that range from low interest loans from a bank, no interest finance from car dealers, lease agreements, hire purchase agreements, loans from a building society against their home, extensions of their home mortgage loan and a personal unsecured loan.

Interest Free Loan - If a borrower wants to buy a new car, the car dealer will normally offer an interest free type loan as an incentive. This would mean that the borrower is able to afford to pay the loan off reasonably quickly, though it could also mean that they will have to pay around 50% of the car's cost price as a deposit. If they do apply for a car dealer loan, they may not have the option of choosing between a new or used car, which they would be able to do if they obtain a personal loan. The car manufacturers and dealers began to supply these interest free loans late in the year 2001 and early 2002, basically to try to maintain the international economy afloat since 9/11. The first interest free car loans were actually issued by the car manufacturers within the US and were supposed to last into the first couple of weeks of 2002. This scheme however was so popular with the consumers that it started a worldwide trend. Even though in the case of the zero interest finance a borrower could end up paying a high deposit which may be at least 40% of the full price. The borrower is not able to sell the car they purchase under this scheme until the full repayments have been made.

Car Title Loans - During an emergency for money, a borrower can easily obtain a car title loan. These types of loans are actually secured by their car, hence they charge a lower rate of interest compared to a cash advance loan, cash loan or payday loan. In addition, car title loans enable the borrower to get a larger loan amount.

Unsecured Car Loan - The main benefit of an unsecured loan is that the borrower does not put something of great value, like their home, at risk. A lot of people already have a mortgage or another secured debt using their property as collateral, so they are understandably reluctant to add any more. Other people do not have a home/property to use for this security, so for them the unsecured car loan is really the only choice they have. Another benefit of these loans is that the loan process is normally completed a lot more quickly compared to a secured loan. This is due to the fact that they do not have to go through the additional step of having the lender decide on the value of their collateral.

Unsecured car loans, however also have disadvantages. They generally have higher interest rates, the sum available for borrowing is normally less, and they quite often come with limitations on how the borrower can spend their loan money. Also, the interest rates and terms of the unsecured loan generally varies depending on the borrowers personal circumstances, so the loan lender’s advertised rate could not really be the rate that they ultimately offer the borrower.

Secured Loans - This form of loan is available only to homeowners as it will be secured against their property. The advantages of these loans are that they can borrow larger amounts of money; they can repay the loan over a longer period; they can obtain extra cash to spend as they please and the lenders are more flexible with regards to a bad credit score.

Hire Purchase (HP) & Dealer Schemes

HP is the traditional method of car finance. Less common nowadays it is organised by the car dealers. Interest rates are often high but the main disadvantage is that you do not own the vehicle until the last payment has been made. If you fail to maintain the monthly payments you could lose the vehicle.

Similar to Hire Purchase with a dealer or manufacturer loan if you do fail to keep up the repayments on the vehicle it may be repossessed. In addition these loans are financed by a very limited number of banks, limiting choice and often leading to a higher interest rate.