A guide to car finance deals
Are you thinking about buying a new car? Then it will come as no surprise to you that new cars are an expensive purchase. For many people, buying a car will be one of the most expensive purchases they make in their lives, second to buying a house. Because of this, most people buy cars on a finance deal, to spread the payment and have flexible options. If you’re not sure where to start, here is a guide to the different finance deals available.
Hire Purchase (HP)
If you intend to fully own your vehicle, then Hire Purchase (HP) finance is the deal for you. This is the most straight-forward type or car finance, as you will pay monthly payments until the car has been paid off, at which point you will own the car
You will pay a deposit and then agree on a term of monthly repayments; this will usually be from 36 to 60 months. The longer the repayment period the higher the interest will be, and the shorter your repayment period, the lower the interest will be. If you know what car you want and you want to own that car, Hire Purchase is a popular and traditional way to buy a car on finance. Bear in mind, you will not own the car until you have finished paying it off.
Personal Contract Purchase (PCP)
Personal Contract Purchase (PCP) is now one of the most popular forms of car finance, with many customers opting for this relatively new option.
Personal Contract Purchase is a flexible, short term deal for those who do not want to commit to a long term contract to purchase the car. PCP car finance is similar to Hire Purchase (HP) contracts in that you pay monthly for your car, but offers you a range of benefits at the end of your contract.
PCP car deals are perfect for people who are unsure about car ownership but who would like the option to buy if they decide to, or for those who like to change their car every few years. One of the reason PCP car deals are attractive is their low monthly payments; as you are not paying for the whole car, your payments are lower than those who buy their car outright on a HP deal. Instead, the majority of the car’s value will be tied up in a balloon payment, required at the end of the contract. Most contracts are between 12 and 48 months long, and at the end of your contract you will have a number of options to choose from to determine what happens next.
You can choose to buy the car at the end of your contract and to do this you will pay the balloon payment, or you can refinance the car and continue to make monthly repayments. If you decide you do not want to buy the car, you can hand the car back (as long as you have not gone over the agreed mileage) or you can start a new PCP contract.
Personal Contract Hire (PCH)
If you do not want to buy a car outright and you have no interest in owning the car, you could try Personal Contract Hire (PCH) car finance. One of the reasons some people don’t like buying cars is the deprecation factor; cars lose their value quickly. One way of avoiding this is by literally hiring the car instead of buying it. PCH deals are similar to PCP deals in that the monthly repayments are lower than if you were buying the car, and so your budget can be stretched further.
You will pay a deposit, and then you will pay a monthly fee to hire the car, without an interest fee. At the end of the contract, you’ll hand the car back and start a new contract or simply walk away.
Whichever car finance deal you decide to go for, make sure you do your research and make sure it is the right deal for you.