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The concept of paying for a vehicle over time - rather than outright - isn’t new but manufacturers and finance companies are becoming more inventive with their products to help you into a new or used car.
In fact some are so appealing, it can make financial sense to pay over time rather than all at once. In terms of personal budgeting, planning car finances so you know what it will cost you each month can also help you keep your bank balance out of the red.
Different types of finance products will suit people’s varied needs so it is important to understand your PCP from a PCH or indeed whether a more traditional bank loan or hire purchase agreement would make sense. Brush up with our guides before you talk to a salesperson to help you receive the best deal.
Technology is supporting new products too. For example, if you don’t have a good credit rating, it is possible to obtain car finance with firms fitting a ‘reminder device’ to your car. Quite simply, if you don’t pay each month, the device will disable your car.
What is PCP Finance?
PCP means Personal Contract Purchase, this is an easy option to finance a new car. The whole deal can be wrapped up in the showroom.
Personal contract purchase - or PCP - is essentially like hiring a car for a period and then being given the option to buy at the end. It starts with a deposit, usually at least 10% and requires monthly payments, usually over two or three years. At the end of the contract there will be an option to pay what’s known as a balloon payment, or simply hand the car back.
A PCP plan works using a calculation around what the car will be worth at the end of the contract period, or Guaranteed Future Value. The finance company will work out its value after (say) three years. What you pay will be the difference between this price and the car’s new value (minus the deposit of course) plus an amount of interest.
The car won’t be yours until the balloon payment has been made and even if you choose to hand the car back, there will be some key points in the small print of the contract to take note of. For example, the deal will be made based on an agreed maximum mileage.
You can go over this but an excess mileage fee will be applied and this can add up to be significant. The car will also be checked carefully for damage and if not considered reasonable wear and tear, repairs for even small marks or scratches will have to be paid for.
A most common option is to simply hand the car back at the end and start a new contract rather than pay what can be a significant sum to buy the car outright at the end. On the plus side, if the market value of the vehicle is greater than the Guaranteed Future Value then this difference can be used toward your next deposit.
What is HP Finance?
Hire purchase often looks attractive to less affluent used car buyers, who don't qualify for personal loans.
Hire purchase is a well-established finance option for acquiring a vehicle without paying for it up front. Usually there is a deposit required at the start (typically 10% or more of the vehicle’s value) and the car is payed-for over a period (usually one to five years).
The important point with HP is that the debt is secured against the car. So unlike using a personal loan - say from a bank - you won’t actually own the car and the finance company can repossess it should you fail to keep up repayments.
At the end of the HP agreement, there is usually a small fee for the option to purchase the car which is really an admin charge to put the vehicle into your name once the loan has been paid off.
With hire purchase, the key is the annual percentage rate or APR, which determines how much you will pay above just the value of the car. It is worth looking for manufacturer offers with low APR figures too as it can sometimes be cheaper to buy a new car with a low rate than a nearly new model with a higher rate.
What is PCH Finance?
PCH which means Personal contract hire is a rental agreement where the purchaser will make monthly payments. This can vary on the contract length.
Personal contact hire - or PCH - is like a long-term rental. It is one of the more straight-forward options to run a car and you’ll simply hand it back at the end. Costs such as car tax are often included (and it will be under the manufacturer’s warranty for any failures) so it is easy to budget just for your fuel.
Like a PCP plan, you will be bound to various terms and conditions so will have to return the car without damage (or pay to have it fixed) and there will be an agreed maximum annual mileage. If you go over this, there will be a charge by the mile which can add up significantly.
What is a Car Bank Loan?
A bank loan which is also referred as a car loan, is where the borrower will pay a fixed amount each month, to pay the car debt off.
There are different ways to finance a new or used vehicle but many are tied to the car itself. For example, with hire purchase, the car will remain the property of the finance company until the end of the contract; with a PCP, a balloon payment must be made at the end of the contract to buy the car.
Taking a bank loan separates this and your car. The car is yours from day one and it is then merely your responsibility to repay the bank. Many banks have loan calculators so before buying a car, it is easy to check how much this will cost you both overall and per month.
A bank loan is therefore ideal for buying a vehicle privately but of course the risk falls to you, the buyer, if there is any issue with the car. This means that it is more important than ever to use a service such as My Car Check to ensure there is no residual outstanding finance on the car, that it hasn’t been crashed or stolen and that it is in fact the car the seller claims.
A PCH contract will suit those who wish to run a new car and know they will want to change vehicle after the end of the contract.