Wed. May 29th, 2024

Different Types of Car Finance

A car is a big investment, so it makes sense to get a loan when you buy one. It also allows you to spread the cost over a longer period.

There are many ways to finance a car, so it’s important to choose the best option for you. The interest rate you receive will affect how much your payments will be.


The most common way to finance a car purchase is by taking out an auto loan. This type of financing is available through traditional banks, credit unions, and online lenders.

When comparing offers, it is important to understand how each factor affects your monthly payment and the total cost of the loan. These factors include the loan amount, interest rate and term of the loan.

Traditionally, loans were for short periods, usually 24 months or less. However, as the price of new vehicles rose, many lenders began offering terms for longer periods.

A longer term will have higher payments, but this can be offset by lower interest rates and the ability to build equity in your vehicle. Paying off your loan early can also help to improve your credit score, as it reduces the amount of credit utilization.


A car lease is a long-term commitment, much like renting a home. While you can always get out of a lease early, you may face higher costs than buying and financing the same vehicle.

Leasing typically involves a down payment and other fees. In addition, you’ll likely have to pay sales tax and other taxes on the leased car at the end of the lease.

You also might have to buy gap insurance, which covers the difference between what you still owe on the car and its depreciated value.

When leasing a new car, you’ll want to carefully consider how many miles you plan on driving yearly. If you drive more than the average, you could be charged additional mileage charges at the end of your lease.

You’ll also want to know the money factor, which is similar to interest but varies by dealer or finance company. Generally, you’ll want to choose a money factor that is less than 0.0025 (the equivalent of 6% APR). This allows you to lower your monthly payments and save on overall car finance costs over the course of the lease.

Hire Purchase Agreements

A hire purchase agreement is a form of car finance that lets you buy a car without paying the full price upfront. You pay an initial deposit, and then make monthly payments for the remainder of the car’s value plus interest.

In some cases, you’ll have the option to pay off the balance of your hire purchase agreement early and become the owner of the car sooner than originally planned. This is known as a ‘voluntary termination’ and can be beneficial for you, but it will show up on your credit file.

If you decide to end your hire purchase agreement, you need to tell the lender in writing. If you do not, they may not treat it as a voluntary termination and you may have to pay half of what you owe on your hire purchase agreement.

The best way to find a hire purchase agreement that is right for you is to shop around. A broker that specialises in car finance can help you to find a deal that suits your needs, and will be able to recommend the best lender for you.

Financing through a Dealer

Dealer financing is an option that dealers offer to consumers who do not want to go directly to a bank. They have relationships with several lenders, and they may be able to get you a loan quickly.

They also might have incentives, such as low APRs on new cars or promotional financing for buyers with a specific credit score. These discounts are a way to increase sales and move inventory.

However, these promotions aren’t always available to all customers. They’re usually only for the newest models and for people with good credit.

If you’re interested in getting a car loan through a dealer, make sure you get preapproved at your bank or credit union before going to the dealership. You can then use this information to negotiate a better deal.

Besides, you should always be wary of auto add-ons that dealers often try to include with a car loan. They can be expensive and can add to your total costs over the life of your loan.

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