Car Finance

The subject of car finance comprises the different financial products which allows someone to acquire a car with any arrangement other than a single lump payment. The provision of car finance by a third party supplier allows the acquirer to provide for and raise the funds to compensate the initial owner, either a dealer or manufacturer. Car finance is required by both private individuals and businesses. All types of finance products are available to either sector, however the market share by finance type for each sector differs, partly because business contract hire can provide tax and cashflow benefits to businesses.

Personal Car Finance is a complete subsector of personal finance, with numerous different products available. These include a straightforward car loan, hire purchase, personal contract hire (car leasing) and personal contract purchase. Therefore, car finance includes but is not limited to vehicle leasing. These different types of car finance are possible because of the high residual value of cars and the second hand car market, which enables other forms of financing beyond pure unsecured loans. Car finance arose because the price of cars was out of the reach of individual purchasers without borrowing the money. The funding for personal car finance is provided either by a retail bank or a specialist car financing company. Some car manufacturers own their own car financing arms, such as Ford with the Ford Motor Credit Company and General Motors with its GMAC Financial Services arm, which has now been renamed and rebranded as Ally Financial. Indirect auto lenders may set risk-based interest rate, or “buy rate,” that it conveys to auto dealers. Car companies may then allow their auto dealers to charge a higher interest rate when they finalize the deal with the consumer. This is typically called “dealer markup.” Markups can generate compensation for dealers and some (those of GM’s Ally and Honda) have been found to use the discretion to charge consumers different rates regardless of consumer creditworthiness.

Personal finance is the financial management which an individual or a family unit performs to budget, save, and spend monetary resources over time, taking into account various financial risks and future life events. When planning personal finances, the individual would consider the suitability to his or her needs of a range of banking products (checking, savings accounts, credit cards and consumer loans) or investment private equity, (stock market, bonds, mutual funds) and insurance (life insurance, health insurance, disability insurance) products or participation and monitoring of and- or employer-sponsored retirement plans, social security benefits, and income tax management.

Personal circumstances differ considerably, with respect to patterns of income, wealth, and consumption needs. Tax and finance laws also differ from country to country, and market conditions vary geographically and over time. This means that advice appropriate for one person might not be appropriate for another. A financial advisor can offer personalized advice in complicated situations and for high-wealth individuals, but University of Chicago professor Harold Pollack and personal finance writer Helaine Olen argue that in the United States good personal finance advice boils down to a few simple points:[9]

  • Pay off your credit card balance every month, in full
  • Save 20% of your income
  • Maximize contributions to tax-advantaged funds such as a 401(k) retirement funds, individual retirement accounts, and 529 eduction savings plans
  • When investing savings:
    • Don’t attempt to trade individual securities
    • Avoid high-fee and actively managed funds
    • Look for low-cost, highly diversified mutual funds that balance risk vs. reward appropriately to your target retirement year
  • If using a financial advisor, require them to commit to a fiduciary duty to act in your best interest
  • Advocate for government social insurance programs

The funding supplier may retain ownership of the car during the period of the contract for certain types of financing, such as a hire purchas or personal contract purchase. This interim ownership by a third party and subsequent leasing to the acquirer is far more typical for business assets than private ones, with the option of vehicle leasing being the major exception for private consumers. The finance is arranged either by the dealer which provides the car or by independent finance brokers who work on commission.