Spreading the cost of purchasing your car
If you’re currently unable to pay the full sum upfront, but require a vehicle then a conditional sale agreement is an option you can consider. Although conditional sales are a common way to buy vehicles, it doesn’t mean that it’s the ideal agreement to suit your requirements.
The following is an outline of a conditional sale finance agreement, which includes how this agreement works and how to decide if it’s the right finance option for you.
A conditional sale agreement: what exactly is it?
If you’re looking to buy a used or new car and need to borrow the money, with the idea of outright ownership of the vehicle as your ambition, there are many available forms of finance open to you.
You can get a standard loan, with many kinds on offer, or a Personal Contract Plan (PCP), although this is not the cheapest way if you’re sure you want ownership of the vehicle. There is also the choice of hire purchase car finance (HP) offered from dealers or brokers.
If you’re happy to commit to buying your vehicle from the outset, then this is an option available to you called a conditional sale. This means you’ll own the vehicle once paid.
Spread the cost of your car with a conditional sale agreement
With a conditional sale agreement, you commit to buying the vehicle then decide how much to borrow and make fixed repayments to the finance company over the agreed term of your contract. When the final payment is made, then you own the car. Unlike a personal loan, while you’re making repayments to the lender, they in fact own the vehicle.
Only on full completion of your repayments is the outright ownership of the car passed to you.
The second difference to a personal loan is that the vehicle is collateral for the debt owed. If you’re unable to make payments the lender can repossess the car to help in settling your debt.
While this isn’t a situation you’d wish to find yourself in, there is an advantage to the vehicle being security. The finance company’s risk of offering funds is far lower than on an unsecured personal loan, which means some applicants who wouldn’t be considered for personal lending could be offered a conditional sale agreement.
Make sure you compare the APR (Annual Percentage Rate) regardless of whether you are selecting a standard personal loan or a conditional sale agreement as this will allow you to see the overall cost of buying the car. Ensure all the deals you are comparing cover the same time period and the deal with the lowest APR is the superior choice.
Conditional sale and how it works
Once you’ve discovered the car you want to buy, you’ll know precisely how much you will need to borrow.
Dealers ask for 10% of the car’s price and in some cases more. When buying a brand new vehicle many dealers, especially ones linked to manufacturers, will offer promotions that could give you a contribution towards this amount requested.
Once accepted, you’ll pay fixed payments each month over a term of between 12 and 60 months. Usual APR rates of interest are commonly between 4 and 8 percent. Some dealers offer 0% finance, but this is usually just for customers with a considerable deposit. It’s worth bearing in mind that should you fail in your obligation to keep up with your monthly payments the finance company does have the right to claim your vehicle.
Your finance deal is finished - what happens next?
Unlike hire purchase agreements, where you must pay an option to purchase fee in order to transfer vehicle ownership to you (usually costing between £100 and £200), with a conditional sale agreement after your final payment is complete, the car is yours.
Never forget that up until the moment you complete that final repayment, the finance company technically owns the vehicle although you’ve committed to owning it at the end. Before you’ve settled this last payment, it isn’t legal for you to sell or modify the car. It’s possible that the lender who holds the conditional sale agreement with you may permit you to conduct a sale of their vehicle, if you request it, and if the price it’s purchased for will settle the outstanding debt.
Voluntary Termination - if you’ve paid half your debt
You can return the vehicle to the lender if you’ve completed payments for half or more of the full debt owed. This is what is called voluntary termination. A clause in the Consumer Credit Act (Section 99 & Section 100) allows you to walk away from a conditional sale agreement at an earlier date. To be eligible for this, you must have completed repayments equal to at least half of the total amount owed, then you can at this juncture end your finance agreement and return the unwanted vehicle to the finance company.
This clause is little known but can be a benefit to you in a condition of sale agreement when:
- You don’t need a car any more
- You’ve a need to reduce your current costs
- You can’t afford your repayments
- You discover another vehicle for a lower price than the total amount of payments still left on your agreement
If you do choose to return it, it’s crucial that the car you return is in perfect condition or you’ll be liable for the cost of all repairs needed. If you’ve not yet made half your repayments, you will be asked to pay any shortfall to meet the halfway point of your payments before ending your condition of sale agreement.
If you do decide to end your agreement early, make sure you get a confirmation in writing from the lender or dealer and make and keep document copies for proof in the event there are claims that you defaulted.