Car loans UK - personal advice, best options

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Car loans are an obvious choice when financing the purchase of a new car in the UK, however you have a number of personal options. Car loans are unsecured, which means you do not need to be a homeowner to get one, and repayments are set at a fixed interest rate for an agreed period of time. From the very first day of the loan, the car is yours. Alternative loans though include hire purchase and personal contract purchase.

With hire purchase (often referred to as HP), you still pay back the loan in monthly instalments but it isn't until the loan is completely paid that you actually own the vehicle. In effect, you are hiring it, hence the name hire purchase. You can buy a car on HP directly from the car manufacturer, via a local dealership, or alternatively by acquiring the funds through an independent lender. If you are going to get it through a manufacturer or dealer, don't rush into anything. Deals and offers are always changing, so make sure you get a good idea of what's on offer before signing on the dotted line.

Another type of car loan is known as PCP (Personal Contract Purchase). This is similar to hire purchase, except the car's value two or three years into the loan is guaranteed by the car dealer. This is known as the MGFV (Minimum Guide Future Value). You repay the loan value minus the MGFV, and at the end of the loan term, you have the choice of whether to buy the car or return it.

If at this time the car's value is less than or equal to the MGFV, you can return the car without further payment, provided you have stuck to the contract. If however you have looked after the car and its value actually exceeds the MGFV, you keep the difference whether you buy the car or whether you choose to return it to the dealer.

Be aware that there are often mileage restrictions on this type of car purchase, and going over the limit can incur hefty charges. With this in mind, PCP may be an expensive finance option for anyone who is planning to use the car for lots of long journeys or is perhaps planning to use the car excessively for work-related reasons.

USA Users - see our sister site for Auto Loans. Information and advice on auto loans on new and used vehicles, bad credit loans, how to improve your credit rating, what to do if bankrupt, title loans, refinancing, how to get the best rates and applying online.

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