In the United Kingdom, financing a car is the most popular way to get behind the wheel of something new without having to pay one large lump sum of money up front.
No matter where you buy a car, you’ll almost always be offered a finance package, whether it’s from a dealer, broker, or supermarket.
Financing options include hire purchase, personal contract plans, personal leasing, and personal loans.
There is a lot to learn about some of these options, so make sure you understand what you’re getting into.
Based on your budget, whether you want to upgrade your car in the future, and whether you want to buy the vehicle outright, you will find the best deal for you.
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Discover which the best car finance option for you by reading is on.
- Personal contract purchase or plan (PCP) explains
- What is personal contract hire (PCH)/car leasing
- Hire purchase: what is it, pros and cons?
- Personal car loan – pros and cons
1. Personal contract purchase or plan (PCP)
The PCP is effectively a loan, but you don’t borrow the full amount of the car’s price.
For a PCP deal, you’ll likely need to make monthly payments after a 10% deposit – sometimes even more.
Typically, these take place over the course of three to five years, before you have a few options for what to do with the car at the end of the term.
Monthly payments are determined by the price of the car, the interest rate (APR), and the expected depreciation of the car.
Understanding PCP is all about depreciation. When you drive a car off a forecourt, its value will drop, though some lose more than others.
Finance companies calculate the predicted value of the car at the end of a PCP agreement when you apply for one.
This is known as the guaranteed minimum future value or GMFV. Moreover, this is also taken into account when calculating how much credit you borrow.
You have three options at the end of the term: return the car with no additional fees; pay a balloon payment (which is the GMFV) and keep the car; or use the resale value towards a new car.
2. Personal contract hire (PCH)/car leasing
Renting a car is similar to PCH, more commonly known as car leasing.
The car is yours for the duration of the contract after you pay a deposit and agree to pay a monthly fee. During the lease, you will also be responsible for any damage.
Leasing contracts typically last two to five years, and deposits are typically three to six times the monthly payment.
Generally, longer agreements result in lower monthly payments.
PCH differs from PCP in that you need to return the car at the end of the contract – there is no option to buy it.
PCH primarily targets businesses with its deals. Many of its deals are priced without VAT.
Make sure the advertised price includes VAT before you sign up. If not, you must add 20% to the monthly price to arrive at what you’ll actually pay.
Pros of PCH
-PCH tends to be cheaper than PCP for a similar car in terms of monthly payments
-You can change your car fairly frequently
Cons of PCH
-For PCP, deposit requirements tend to be higher
-You can’t buy the car at the end, no matter how much you like it
3. Hire purchase (HP) explained
The HP agreement typically involves paying a deposit (usually at least 10% of the car’s value), and then paying the balance plus interest in monthly instalments, over a fixed term.
Most of these agreements run for one to five years.
To take ownership of the vehicle, you will need to pay a ‘transfer fee’ or ‘option fee’ at the end of the term.
This means that you cannot sell the car without the lender’s permission – though this is often relatively easy to obtain
Pros of hire purchase
-HP is easy to understand and simple to use
-You own the car once you pay the transfer fee and all the payments have been made
-It may be easier to be approved for HP than a personal loan if you have a poor credit history.
Cons of hire purchase
-Until the last payment and transfer fee is made, the car belongs to the finance company
-Services are not usually included in service packages
-The cost of HP is higher than that of other car financing options
4. Personal loan
A personal loan requires you to borrow a fixed amount, and then repay it in fixed monthly payments plus interest.
The loan term can be anywhere from one year to seven years.
Interest rates depend on how much money you borrow. Generally, loans for smaller amounts have a higher APR, whereas loans for £12,592 or more have a lower APR.
When you take out a loan to buy a car, you’re effectively a cash buyer, regardless of whether you’re buying from a dealer, a supermarket, or a private seller.
A personal loan can be secured or unsecured.
A secured loan is usually cheaper, but it is secured on your home – so if you fail to make payments, your property will be at risk.
The risks associated with unsecure loans are lower, but the costs will be higher in the long run.
Pros of personal loans
-As long as your credit rating is good, you’ll be able to get a competitive interest rate
-Using a personal loan to buy from a private seller is possible
-Cash buyers may be able to negotiate a better price
Cons of personal loans
-If you do not have a good credit score, you might have difficulty finding an affordable loan
-Due to ownership, all repairs and maintenance fall to you
-The loan must be repaid even if you sell the car
The next time you buy a car, save money Do you already know what car you want? Sign up on Getmecarfinance, configure the model you want, and contact your preferred dealer when your offers arrive to discuss your finance options.