What is the difference between a loan and car finance?

Part of being able to save money for me is understanding what all the different terminology means and how it impacts me and my family.

One of the things that always confused me was the wording around car finance I am going to use BMW car finance as an example for this post

Contract Hire

The best way to look at this is like renting a house, You pay a set amount of "rent" for the car each month and at the end of the agreed term you hand back the keys and owe no more. Car leasing or contract hire often comes with mileage restrictions - charging you by the mile if you exceed those restrictions.

Contract Purchase

This is the same as contract hire in that you pay a set amount each month, but includes the option to buy the vehicle over time period or by paying a lump sum at the end of the term. The benefits of contract purchase over contract hire is that you own the car at the end of the term and that you pay a fixed monthly amount and /or lump sum.

Personal Loan

There is nothing stopping you taking out a personal loan for any car that you are purchasing. But you need to consider the term as well as the value that you are borrowing - cars depreciate quickly and you don't want to be paying off a loan for five years on a car which isn't going to be worth anything by the end of it. Also it is getting harder to get a loan thanks to the credit crunch.

Other considerations:

Do I need PPI (Payment protection insurance)? Payment protection insurance (PPI) is sensible but many people will suggest that you avoid buying it from your loan provider.

Why not buy PPI from an independent provider such as Paymentcare, British Insurance or the Post Office. They will let you pay a monthly premium on your insurance and will let you cancel at any time.

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