Buying a car with a personal loan means applying for a loan in the same way as you would do for any other purchase, and then using the money to pay the seller in full for the car.
The loan is then paid back in monthly payments, with interest rates and the size and number of monthly payments depending on the loan provider and amount.
The main benefit of using a personal loan to finance a car purchase is that you then own the car straight away. There is no leasing required, the car is yours. If you wish to sell it after 6 months and choose a different car with the money you can do, and only a loan purchase gives you this freedom.
You are also free to buy the car from wherever you wish, and as a cash buyer you may be able to negotiate small discounts.
The main disadvantage is that a personal loan is usually harder to get than other forms of car finance, and may need to be secured on your home.
ii) Hire Purchase
Buying a car on hire purchase has long been considered the traditional way. You pay a deposit (normally between 10% and 20% of the car price) and then monthly payments over a set period in a similar way to a personal loan.
"Buying a car on hire purchase has long been considered the traditional way"
The main advantage of hire purchase is that it can be easier to obtain than a personal loan, and is often cheaper.
The main problem with hire purchase is that you do not own the car until the last payment has been made. This means you are unable to sell the car without the permission of the hire purchase company. There is also a risk of the car being repossessed if you fall behind on your payments.
Hire purchase is usually only available on new and used vehicles under 3 years old.
(iii) Personal/Business Contract Purchase
Buying a car on Contract Purchase involves paying a deposit of up to 20% and then paying low monthly payments (normally for up to 3 years) with a final lump sum.
At the start of the agreement, a guaranteed end value is given by the finance company: the GMFV or Guaranteed Minimum Future Value. After the low monthly payments have ended, you can either:
Pay the GMFV amount as a final payment and keep the car.
Return the car and pay nothing more (nothing is refunded either).
Part-exchange the car. If the car is valued at above the GMFV price then the additional figure is put towards your deposit on the new car. If the car is valued at below the GMFV, you will not have to pay the difference because the amount was guaranteed at the start of the agreement.
The GMFV figure is based on the mileage you believe will be used over the course of the agreement. If your mileage at the end of the term is above that stated in the GMFV then the guaranteed amount will be reduced accordingly or a charge levied for the additional mileage wear and tear on the car.
"monthly payments are much less than on other finance arrangements"
The main benefit of a contract purchase is that the monthly payments are much less than on other finance arrangements. As much of the value is part of the final payment or CMFV then the monthly payments cover a smaller amount of the car, and are therefore lower.
The main disadvantage is that you do not own the car, and if you do not pay the final payment then you end up with no car despite the money already paid.
Contract purchases are ideal for people that want to change their car every 2 or 3 years, but in most cases it works out more expensive than other forms of finance, and can leave you in a difficult situation if you do not plan carefully.
If an employee purchases a new car on a personal contract purchase scheme, then they are not liable to pay “benefit in kind” tax. So replacing a company car with money towards a contract purchase can save on tax costs.
(iv) Personal Contract Hire
Running a car on contract hire does not actually involve buying the car. You pay a fixed monthly rental charge based on the estimated mileage over a specific period of time.
At the end of the contracted period, the vehicle is handed back with no more to pay (apart from possible excess mileage charges to cover cost of wear and tear).
The main advantage of contract hire is that there is a low initial cost, and the monthly payments are less than would be needed to buy the car on a personal loan or hire purchase. The maintenance of the car can also be included in the hire cost.
There is less risk involved with hiring a car, but the disadvantage is you never actually own the car. This is a good option if you plan to change car regularly.
An employee obtaining a new car on a contract hire scheme is also not liable for “benefit in kind” tax, and if the vehicle is used for some business purposes, there are further tax benefits.
(v) Business Contract Hire
Business contract hire works in a similar way to personal contract hire. The company is charged a fixed monthly payment based upon the age of the car, length of the contract, and mileage the car will be covering. The vehicle is handed back at the end of the contract.
The main advantage of business contract hire is the reduced tax charges it brings. If the vehicle is used for both business and personal use, then it is possible to claim back up to 50% of the VAT on the rental finance, and up to 100% of VAT on any maintenance costs. If the vehicle is used only for business purposes, then it is possible to claim back up to 100% of the VAT on the total rental cost.
Paying a maintenance cost each month also means that there is less burden in the running of the cars.
If your business is not VAT registered then you will not get all of the tax benefits from a contract hire scheme, but VAT registered companies can save a lot of money in taxation by using this method of vehicle funding.
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