Customer Finance Factsheet
Conditional Sale (CS)
Conditional Sales agreements involve a finance company (the creditor) purchasing a vehicle on behalf of the customer (the buyer), which allows the customer to pay for the vehicle in installments. This enables the customer to pay a deposit and take immediate possession of the vehicle; however, the title to goods remains with the creditor until the buyer satisfies the conditions of the agreement. In other words, the finance company own the vehicle until all payments have been made.
Hire Purchase (HP)
A Hire Purchase agreement is much the same as a conditional sale agreement. The only difference between them is simply that under hire purchase, the consumer is under no obligation to take title to the goods, whereas under conditional sale, transfer of title is automatic upon the completion of the condition (usually of course, the full payment of the vehicle).
Hire Purchase and Conditional Sale agreements are simple and easy to arrange at a dealership. They are convenient, on the spot, finance options which offer flexible repayments suited to the buyer. Interest is fixed so you have a fixed monthly payment. A deposit secures the vehicle and regular payments are made over a pre-agreed period, usually 12–60 months.
You do not own the vehicle until the end of the contract, which means you cannot sell the vehicle at any time during your contract without the financier’s approval. The vehicle can be repossessed if you do not make your payments.
If you have paid a third or more of the vehicle’s value, and dependent on the type of finance agreement, you can have additional legal rights and if you default on payments, the financier would have to obtain a court order to repossess the car.
To reduce monthly payments, a larger payment or lump sum called a balloon payment can be made at the beginning or end of the agreement period. Often the customer would pay a balloon payment on the last installment of their lease.
Guaranteed Asset Protection Insurance (GAP)
This product provides protection for any shortfall liability of the balance between the market value placed on the vehicle and paid out by the motor insurer, and the amount required to settle the outstanding balance in the case of a write-off or if the vehicle is stolen.
Credit Protection Insurance (CPI)
Credit Protection Insurance protects you if you have an accident, fall ill or lose your job. In any of these circumstances, this product will ensure you do not fall behind with your finance payments.
The term annual percentage rate (APR) refers to the interest rate, as applied to finance, for a whole year rather than just a monthly fee/rate. In short, it is a finance charge expressed as an annual rate and can be used as a benchmark by which you can judge the cost of borrowing.
An important Decision
A van – whether new or used – is often the second most expensive purchase you’ll ever make in your life, next to your home. Because of this, it is important for you to explore and understand the variety of vehicle financing options available. Only then will you be able to identify and decide which best suits you before making a final commitment.
There are a number of ways of obtaining finance for a vehicle including:
• Vehicle manufacturer’s insurance
• Independent finance companies
• High street banks
• Building societies
• Other direct lenders
• Online finance specialists
In weighing up the pros and cons for each of these options, it is also important to consider things such as the terms offered (eg. the amount of credit given, amount of monthly payment, number of monthly repayment installments, APR, etc.)
Opting for dealer finance means:
• The vehicle will be checked to make sure there is no outstanding finance or that it hasn’t been written off in an accident.
• Finance is secured against the vehicle so it may be easier to get approval.
• Because the finance company own the vehicle and has paid money directly to the retailer, the finance company can assist in handling merchantable quality disputes.
• Your dealer can arrange a finance package for you there and then so you can drive the vehicle away at point of sale.
• The vehicle can be used immediately whilst allowing repayments to be staggered, giving you a better cash flow.
• Agreements are easily negotiated and available.
• Motor finance loans are not repayable on demand unless you default on the agreement or if the vehicle is written off and there is a shortfall liability.
• If eligible, you can take out GAP and CPI Insurance with the agreement to protect your ability to repay the loan should you fall ill, have an accident, lose your job, write the car off etc.
• Interest is fixed so you have a fixed monthly payment.
Other finance options
• Can attract a fee for card transactions
• The limit on your credit card may not be enough to purchase the car you choose
• Lots of companies offer 0% for the first 6 months but the rates after this time can be high
• If you don’t clear the balance interest charges can be high
• Can be arranged through banks and building societies and are separate from the vehicle
• Rates can be attractive for certain customers but they are based on individual circumstances such as term and customer credit history
• Loans may be secured against your home
Keep in mind
• Establish your budget – not just the sales price you are willing to pay, but also what you will pay over the entire agreement including the deposit, interest costs incurred (made up of APR) and other monthly/annual charges such as road tax, insurance etc.
• Compare apples with apples when looking at your repayment rate, i.e. the Annual Percentage Rate – APR is a measurement that allows you to compare different finance options offered by lenders, taking into account the closing fees of the finance companies and giving you the total cost over the period of the loan.
• Read the small print – make sure you know and understand what you are signing up to.
If it is a second hand vehicle, make sure it has all its service records and that they are up to date – beware of such common defects as hidden write-off damage and outstanding finance. If you’re not using dealer finance, get the RAC or AA to check the vehicle before buying.