Car Finance Explained
Our guide to car finance explores the three most popular ways to finance your vehicle so you can get an idea of which finance option could be the right one for you.
Deciding how to finance your car is an important decision, which is why we've collated the information you can read below.
8 out of 10 new cars were purchased on finance in 2018 (According to the Finance & Leasing Association).
There is a finance calculator available for all of our used cars. After finding the used vehicle you would like a finance quote for simply click "Finance Calculator" and you can immediately craft a potential finance plan that works for you.Contact us
So, how much do you know about car finance?
This information explores the three most popular car finance plans – Hire Purchase (HP), Personal Contract Hire (PCH) and Personal Contract Purchase (PCP) – so you can get a better idea of which finance agreement would be the one the suits you best.
Hire Purchase (HP)
If you opt to finance your vehicle with a Hire Purchase agreement, usually you will need to pay an initial deposit, followed by fixed monthly instalments over an agreed term to pay off the entire value of the vehicle. When all the payments have been made, the Hire Purchase agreement comes to a close and you will own the vehicle.
You can drive away in a new car that you may not have managed to otherwise buy outright. Unlike other finance agreements, you won’t need to estimate your predicted mileage at the beginning of the Hire Purchase finance 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
The monthly payments will likely be higher for Hire Purchase agreements than with other finance options because in this case you are paying off the full value of the car month by month. You won’t be able to sell the car without settling the outstanding finance first.
Personal Contract Hire (PCH)
A Personal Contract Hire (PCH) agreement is basically a long-term rental contract. This will likely suit you best if you’re not looking to buy and own the vehicle at the end of your contract. You just lease the car for pre-determined period of time and make fixed monthly payments. When the agreement comes to an end and all monthly payments have been made, you can return the car to the dealership, take out a new contract, or take out a new contract on a new car.
Personal Contract Hire agreements are notoriously quick and easy to arrange. You can drive away in a new car without any concerns about the warranty running out, or selling the car in the future. Your monthly payments will be much lower than if you were on a finance agreement where you were potentially buying the vehcile at the end of the contract. As a flexible finance agreement you can change the car easily, and essentially be given access to new cars that you otherwise may not have been able to afford to buy.
Things to bear in mind
You will not have the option to buy the car at the end of the agreement. You will need to agree an estimate of your predicted mileage at the beginning of your agreement. If you exceed this mileage you will likely have to pay a fee which will be predetermined and agreed before you commence with the contract. You will need to take out comprehensive car insurance as it will not be included in your contract.
Personal Contract Purchase (PCP)
A Personal Contract Purchase (PCP) agreement is similar to a Hire Purchase agreement as you will usually pay an initial deposit, followed by monthly instalments. What makes a PCP contract different is that your monthly payments don't pay off the entire value of the car, rather they're calculated to pay off the predicted depreciation of the car instead.
How does a PCP agreement work?
When you commence with your PCP contract, a Guaranteed Minimum Future Value (GMFV) of the car is estimated and agreed. This is essentially what the car is expected to be worth at the point your contract ends.
This means that the money you are borrowing and repaying is simply the difference between what the car is valued right now, and what it will be valued at the end of the PCP agreement after depreciation. It is this difference that you will pay off in monthly instalments over the agreed term.
Because you will be paying towards a smaller total this means PCP agreements provide lower monthly payments. However at the end of the contract you will need to pay a final payment (the Guaranteed Minimum Future Value) if you want to buy the vehicle at that point. Once your monthly payments are paid and the term is over, you’ll have three options to choose from:
- Buy the car and pay the final balloon payment (the Guaranteed Minimum Future Value)
- Hand the car back to the dealer - the finance company already predicted the Guaranteed Minimum Future Value of the car, so simply handing the car back will settle the deal
- Part exchange for a new car
Monthly payments on a PCP agreement are more often lower than if your car is financed under a Hire Purchase agreement. If you decide not to buy the car, you are not obligated to do so once you’ve made all your monthly payments.
Similar to Personal Contract Hire contracts, you can drive away a new car every three years without worrying about it running out of warranty, or having to sell it on.
If your car is worth more than the Guaranteed Minimum 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 and own the car you will need to pay your final balloon payment when the term ends (the Guaranteed Minimum Future Value). Similar to a PCH agreement you will need to agree on a predicted approximate mileage at the beginning of your contract. If you go over this mileage allowance you may incur charges, so it's important to predict this accurately.
Can I settle a PCP agreement early?
In most cases you are able to settle your PCP contract early, however many finance companies will need you to pay off the difference between what your car is worth now, and what you still owe (negative equity). For example, if your vehicle is currently worth £12,000 but your finance settlement figure is £14,000, then you will be required to pay the £2,000 difference in order to clear that negative equity. Be sure to keep an eye out for early repayment charges if you're hoping to settle a PCP agreement early!
Which is the best finance option for me?
Determining the best finance option purely comes down to what it is you’re looking for. If you like to change your car every three years, you have manageable mileage and you’re looking for low monthly payments then a PCP or PCH deal could be the best choices for you.
If you want to own your car outright at the end of your monthly payment term without having to pay a final lump sum, then a Hire Purchase deal provides you this option, albeit the monthly payments will likely be higher to cover the entire value of the car.