Car Finance Explained
Which finance is right for me?
It all depends on what you're looking for. If you're someone who likes to change their car every three years, and you're looking for low monthly payments then a PCP or PCH deal might suit you. If you want to own your car at the end of your monthly payments without paying a final lump sum, then a Hire Purchase deal offers this. Read on to find out about each options pro's & cons........
Hire Purchase (HP)
If you choose to pay for your car with a Hire Purchase agreement, you will normally pay an initial deposit and will pay off the entire value of the car in monthly instalments.
When all the payments are made, the Hire Purchase agreement ends and you own the car.
- You’ll be able to drive away a car that you may not have managed to buy outright.
- Unlike a PCP or PCH contract, you won't need to estimate your mileage at the start of your Hire Purchase agreement, so you'll avoid excess mileage charges.
- Once you’ve made your final monthly payment, you'll have full ownership of the car.
Things to bear in mind:
- Monthly payments may be higher than other finance options, such as PCP, as you're paying off the full value of the car.
- You won’t be able to sell the car without settling the finance.
Personal Contract Purchase (otherwise known as 'PCP')
Personal Contract Purchase (PCP) is similar to a Hire Purchase agreement as you will usually pay an initial deposit, followed by monthly instalments.
What's different with PCP, is that your monthly instalments are only paying off the depreciation of the car, rather than the entire value of the car.
How does PCP actually work?
At the start of your PCP contract, a Guaranteed Future Value (GFV) of the car is estimated. This is the car's expected value when your contract ends.
For you, this simply means that the money you're actually borrowing and repaying is the difference between what the car is worth now, and what it will be worth at the end of your contract (the depreciation). You'll pay this difference off in monthly instalments.
This means lower monthly payments for you, but you will need to pay a final payment at the end (the Guaranteed Future Value) if you want to buy the car.
Once your monthly payments are finished, you’ll have three options:
1. Buy the car by paying the final balloon payment (the Guaranteed Future Value)
2. Hand the car back - your finance company has already predicted the Guaranteed Future Value of the car, so handing the car back will settle the deal.
3. Part exchange for a new car
- Monthly payments on a car financed by PCH are usually lower than if your car is financed by a Hire Purchase agreement.
- If you decide not to buy the car, you can simply walk away when you've made all the monthly payments.
- Similar to PCH, you can drive away a brand new car every three years without worrying about it running out of warranty, or selling it on.
- If your car is worth more than the Guaranteed Future Value then you can use that equity towards a deposit on a new car.
Things to bear in mind
- If you want to buy the car you will need to pay your final balloon payment (the Guaranteed Future Value)
- Similar to PCH, you will need to agree on an approximate mileage estimate at the beginning of your contract.
Personal Contract Hire (PCH)
Personal Contract Hire (PCH) is a type of long-term rental that will suit you if you’re not looking to buy the car at the end of your contract. You lease the car for an agreed period of time by making fixed monthly payments. When the contract expires, you simply return your car or take out a new contract on a new vehicle.
- It’s hassle free, as you can drive away a new car without worrying about the warranty running out, or how you'll re-sell it.
- Your monthly payments on the car will be much lower than if you were buying it.
- It's flexible - you can change your car easily, and you will have access to new cars that you may not have been able to afford to buy.
Things to bear in mind:
- There’s no option to buy the car at the end.
- You will need to agree an approximate mileage estimate at the beginning of your contract - there may be a mileage charge if you exceed this.
- You’ll have to take out comprehensive car insurance - it's not included in your contract.
Now that you know which contract will suit you best, give us a call on 02844833233 and we can get you into THAT car!
The Team at Bells Crossgar