What are My Car Finance Options?

Allowing you to split the cost of your vehicle into manageable monthly instalments, car finance plans have become highly popular, but these agreements can be quite complicated and it is important to know exactly what you are getting into before you sign up.

What is Hire Purchase (HP) Finance?

HP finance is fairly straightforward. This type of agreement will usually last a period of up to five years and it enables you to break down your total payment into an initial deposit and monthly instalments. On top of the borrowed credit that you are repaying, you will also be required to pay interest. The interest will be incorporated into your monthly payments and will remain a fixed rate. 

When your HP contract ends, you will become the legal owner of the vehicle, and you will be able to either keep it or sell it on. This is the main difference between HP finance and PCP finance.

What is Personal Contract Purchase (PCP) Finance?

Similarly, PCP finance involves a deposit followed by monthly payments, but rather than these adding up to the total cost of the car, you will only be paying for the vehicle’s depreciation. The reason for this is that you won’t actually have to purchase the car if you do not want to – the bulk of the payment will be deferred until the end of your contract, when you will have to choose whether or not to keep the vehicle.

If you do not want to keep the vehicle at the end of your contract, you can simply return it to the dealer and walk away. If, on the other hand, you wish to become the legal owner of the car, you will be required to pay a substantial amount, known as a balloon payment, and it will become yours.

Is Buying a Car on Finance the Right Choice for You?

Buying a vehicle with cash upfront is ideal as you will not have any debt or interest to pay, although it does place limitations on you. It might mean that you have to save up for months or even years before you can get behind the wheel of a car you love, or it may mean that you’ll have to settle for less than your dream car. 

HP and PCP finance enable you to get a newer, high-value car, that you might not have been able to afford if you were to buy outright. However, a finance plan is a long-term financial commitment and you should make sure that you will be able to keep up with the monthly repayments before you enter into an agreement.

Which Finance Type is Right for You?

There are a number of benefits to both HP and PCP but ultimately, it will depend on your personal financial circumstances and preferences. 

The benefit of HP finance is that you will definitely become the legal owner of the car at the end of the contract, so you won’t have to worry about exceeding any mileage caps or damages to the vehicle, as you would with a PCP contract. Your monthly payments will also be a fixed amount, and you will not have a large looming payment.

The main advantage of PCP finance is that your monthly payments will be lower, because you are not covering the cost of the car. The monthly repayments will instead be calculated based on a prediction of how much the vehicle will be worth at the end of the contract term.

For some people, having the option of keeping the car or returning it is a definite benefit too, particularly if you enjoy experiencing new models, because once you return a vehicle, you can enter another PCP agreement straight away.

Whether you choose HP or PCP may also depend on availability and your credit situation. HP finance is typically available for more vehicles than PCP finance is, and applicants with bad credit are more likely to be accepted for HP finance as well.