A Guide to Your Car Finance Options
When it comes to financing a car there are many options to choose from, along with countless dealers, lender and brokers who offer them, which all makes for a rather confusing state of affairs – even more so if you’re a first time finance customer.
However, fear not as we have compiled a comprehensive guide to three most frequently offered types of car finance. Once you’ve read the following guide you might also find this 60 second car finance Q&A useful, created by CreditPlus, it helps you to determine the best car finance option for you.
Any how, without further a do, here’s the guide:
Personal Contract Purchase (PCP)
Personal Contract Purchase (PCP) is by far the most popular type of car finance in the UK, it accounts for a whopping 80% of all new agreements, but remains a relatively misunderstood personal finance product.
Essentially, the PCP is the most flexible of all car finance options. It enables you to pay a small deposit, usually no more than 10 per cent of the cars value, select an annual mileage and pay for your use of the car, usually over a period of 48 months.
The payments are calculated by the lender who essentially estimates how much the car will be worth a the end of the agreement, known as the Guaranteed Future value (GFV), they then deduct this amount and any customer deposit that is due from the purchase price of the car and the amount that remains is divided equally across the duration of the agreement.
Come the end of the agreement, you have three options. The first is to simply hand the keys and car back to the finance company. Provided the car has no damage and you haven’t gone over the mileage allowance, there will be nothing to pay. The second option is to part ex it for a new car, in this case any value over and above the GFV is used as your deposit on a new agreement.
The third and final option is to pay the GFV and gain ownership of the car. It’s also worth noting that some lenders will allow you to refinance the GFV if you are unable to pay in a single hit.
- Lower monthly payments than other types of finance as you are essentially only paying to use the car and not to own it.
- The flexibility to choose from three options at the end of the agreement – Keep the car and pay the GFV, hand it back and pay nothing (subject to mileage and condition), use any value over and above the GFV as a deposit on a new car.
- Large GFV to pay at the end if you wish to gain ownership of the vehicle.
- Fixed mileage allowance and an additional cost per mile for any overage.
- This cost per mile can be as high as 12p.
- Any damage that is deemed to not be general wear and tear must be paid for at the end of the agreement (unless you pay the GFV to gain ownership).
Hire Purchase (HP)
HP is best described as a vehicle hire agreement, all be it a long one, that develops into vehicle ownership once all payments have been made. A HP agreement begins with a customer deposit or a part-ex and once agreed it is deducted from the purchase price of the car.
Following this deduction, the remaining balance is evenly divided across a schedule of payments, which are collected monthly, via Direct Debit. A typical HP agreement runs for between 36 and 60 months and unlike some other types of finance there are no restrictions on mileage and therefore no overage charges to worry about at the end of the agreement.
It’s also worth noting that some lenders that offer HP agreements now use black box technology in order to mitigate the risk of lending. It essentially enables the lender to safely disable the car in the vent of a series of failed payments. However, this is usually only for people who have a history of adverse credit.
- Available to people who have had trouble managing their finance in the past. Those with CCJs, defaults, arrears and ex-bankrupts are often considered.
Guaranteed vehicle ownership once all payments have been made.
No mileage restrictions so you can essentially cover as many miles as you like without the worry of overage fees, which can equate to as much as 12p per mile with other types of finance.
- Higher monthly payments than other finance agreements such as the Personal Contract Purchase (PCP).
- You don’t own the car until all payments have been made and it can therefore be recovered without a court order in the event you fall behind on payments.
Personal Contract Hire (PCH)
Personal Contract Hire (PCH) is essentially a long-term vehicle rental agreement and there is therefore no option to own the vehicle. Essentially, you use the car for an agreed period of time at the end of which you return it to the finance company and provided there is no damage and you haven’t exceeded the mileage allowance, there’s nothing to pay, you simply walk away.
A PCH usually requires you to make an initial payment. The sum of which will likely equate to between three and six monthly payments. This is then usually followed by a schedule of 47 monthly payments. However, the duration may difer.
The aforementioned payments are calculated based on how much the car is worth today, it’s future value and the mileage allowance you have opted for. Whether or not you choose to include a maintenance plan will also have an impact on the monthly payments.
- There’s no interest to pay, which could save you hundreds if not thousands of pounds over the duration of the agreement.
- PCH comes with optional maintenance packages that can include servicing, tyres, roadside assistance and more.
- Vehicle tax is included, which could save you hundreds of pounds every year.
- As you are only paying to hire the car for a fixed-term, there’s no need to worry about the risk of depreciation.
- As PCH is a long-term hire agreement you will never actually own the vehicle. It’s essentially dead money in the same sense that renting a property is.
- A mileage fixed limit will apply and any overage will be charged at a cost per mile. As with a PCP this could be as much as 12p per mile.
- As with a PCP any damage to the vehicle must be paid for, with the exception of general wear and tear.