As you know this site is concerned about Gap Insurance, as we feel it is an area that can be poorly understood. However, our contributors have a wealth of experience in motor vehicle sales, service, finance and insurance, and we are always happy to give our opinions on a range of subjects should the moment arise.
So whilst we will continue to answer common questions on Gap Insurance, we will also answer any other queries that may come our way.
We were asked a question regarding motor finance through the dealer, as opposed to direct lenders, such as banks, and to whether there are any advantages to take your finance through the dealer?
The main difference between finance through your dealer and through a direct lender, is that the showroom finance is usually tied to the vehicle. This makes this a ‘hire purchase’ agreement, as opposed to the bank for example, which would be a personal loan.
What is the difference?
Well the showroom finance is linked to an item, whereas the loan through the bank is not. This means that you can have extra protection on the showroom finance, namely your ‘termination rights’.
This allows you to hand back, or termination your finance agreement, once you have paid half the total amount payable on the agreement.
So lets say you buy a car for £10,000
You pay a deposit of £2,000 and finance £8,000 through the dealer.
With your interest charges the amount you pay back on the loan is £11,500.
So thats £2,000 deposit plus the £11,500 you paid back on the loan, giving you £13,500 in total.
Half the total amount payable for the vehicle is £13,500 divided by 2, £6,750.
If you were paying the l,oan over 60 months, then you are paying £191.67 per month.
As you have paid £2,000 deposit, to get to the halfway point you have to pay another £4,750 in monthly instalments. At £191.67 per month, it will take you 25 months to reach this point.
That means after just over 2 years of a 5 year agreement, you can hand the vehicle back to the finance company.
Why would you do this?
The primary reason is simply that the vehicle is not worth the settlement you still owe on it. .
This form of protection is not something you can get with a personal loan from the bank usually.
Will the dealer tell you about this? Well maybe not, quite often the dealer will have commission from the motor finance company, and if you settle the loan early, or terminate your agreement, then the commission can be taken back off them.
However, if you take a good look at your finance agreement, if you can fins a box or a section highlighting your ‘Termination Rights’ then this should all be detailed in there for you.
Please note that if you have put a deposit into the agreement, you will not get this back, as it forms part of the ‘half’ you have to pay. Indeed, the chances of the vehicle being worth less than the finance settlement will always diminish depending on the size of deposit you have put down.
More Motor Finance differences
Another form of finance that you are unlikely to see from a direct lender is the Personal Contract Purchase, or PCP agreement. This is another form of Hire Purchase, and it is not well known that you could actually hand back the vehicle before the end of an agreement, simply due again to your termination rights on the loan.
Motor Finance can often be at a higher interest rate than a direct lender, although some subsidised deals from the manufacturer can give you 0% or low rate finance offers. Would you expect to see a loan from your bank at 0%? NO!
When choosing your method of funding, there are lots of things to consider, but one aspect of motor finance that is not often raised is the extra protection it can give.