Car finance can sometimes be daunting; with so many options to choose from, it can be difficult to decipher which is right for you. When choosing finance it’s important that you consider your lifestyle, budget and credit history. This is why we have written our quick guide to car finance. All credit agreements are ‘subject to status’; this means that they vary on your credit-worthiness. With the large number of products available on the market, there is an option for everyone!
What is Hire Purchase (HP)?
Hire purchase or ‘HP’ is a contract between the customer and the lender. The customer agrees to a set number of repayments, typically with a 10% deposit and a final ‘option to purchase fee’. The repayments are made up of the cost of the vehicle and the rate at which the loan is provided. Until all the repayments are met, the lender owns the vehicle. Once the agreement is finalised and any ‘option to purchase fee’ has been paid, which legally transfers the ownership of the vehicle to the customer. In most cases, the customer can choose to spread the loan over a term of 12 to 60 months. A Hire Purchase agreement can be settled at anytime during the contractual period by settling the outstanding balance.
What is Personal Contract Purchase (PCP)?
A Personal Contract Purchase (PCP) is
a purchase agreement; you agree to purchase the car when you sign the agreement. A PCP loan is spread over a term of 12 to 36 months with a fixed monthly payment. Repayments are dependent on the size of the deposit, anticipated mileage and the term of the agreement. Using this information and the predicted future retail value of the vehicle, the lender calculates the GFV (guaranteed future value). GFV is a set amount that the vehicle will be worth at the end of the agreement. At the end of the agreement the customer has three options:
1. They can keep the vehicle by paying the outstanding balance and ‘balloon payment’. The ‘balloon payment’ is the difference between the balance you have already paid and the GFV.
2. The can hand the vehicle back
3. The can part-exchange the vehicle for another finance agreement.
The agreement can be ended at any time by settling all outstanding balances on the agreement and paying any necessary fees.
What about a personal loan?
A personal loan (PL) is an unsecured financial agreement. Unlike other agreements, a PL does not require a deposit. A PL operates at a fixed rate of interest, over a set term of 12 to 60 months. The finance company ‘loans’ the funds to the customer to buy the vehicle. The customer immediately takes ownership of the vehicle. When a customer signs a personal loan agreement, they agree to make regular payments to the lender, until the amount borrowed, plus interest, is repaid in full. As the customer has title to the vehicle, there are no mileage or usage restrictions. The agreement can be ended at any time by settling all outstanding balances on the agreement and paying any necessary fees. Unlike other agreements, in the event of non-payment, other assets than just the vehicle may be seized.
What Is Contract Hire?
If you don’t want to own a vehicle, like to change cars regularly, do not want to suffer the costs of depreciation then contract hire is the agreement for you! Like renting a house, contract hire is renting a car. When choosing a contract hire agreement, it is recommended that you choose a newer vehicle. The newer the vehicle, the lower the repayment as value of the car will not depreciate as much as an older vehicle. Contract hire is open to private individuals or businesses. As the payments attract VAT, this type of agreement is ideally suited to VAT registered businesses.
The customer chooses a vehicle and opts to hire it for a set period of time, at a set mileage, and pre-agreed monthly cost. Once the leasing period is finished, the customer hands the vehicle back to the leasing company. The customer will not be required to pay any fee at the end of the contract. Charges may apply if the vehicle is not in good condition; any damage that is beyond reasonable wear and tear is the responsibility of the customer. If the customer has exceeded the anticipated mileage, they will be charged at pence per mile rate plus VAT.