If you need finance to buy your next car, you are in the right place. Below, we briefly explain what the two most popular forms of car finance are. Then provide an overview of the pros and cons of each of them.
Of course, because we are not financial advisors you will still need to do some more research before signing on the dotted line. But, this overview will save you time and help you to identify the questions you need to ask to make sure that you secure the right deal for you.
Hire Purchase (HP)
HP is the oldest and still the most commonly used form of car finance. As the name suggests, with this type of arrangement, you are effectively hiring the car you buy from the loan company. But, from the start you own a percentage of the car. How big a percentage depends on how much of a deposit you paid and how much the interest and any loan fees are.
Because the finance firm pays the dealer for the car you owe them the balance of the money. Should you fail to make payments the agreement is terminated and the car will be repossessed and used to pay off the debt.
But with each payment you make you own a bigger percentage of the car. Once you have made all of the agreed-upon payments, you become the sole owner of the car. At that point, you can legally sell it to someone else and make modifications to the vehicle.
Personal Contract Purchase (PCP) or Leasing
In many ways, a Personal Contract Purchase (PCP) is very similar to leasing which is also known as a Personal Contract Hire (PCH). At the end of the PCH/lease, you always have to hand the keys back and go off to buy another vehicle or lease another.
With a Personal Contract Purchase (PCP) 2 or 3 things can happen once the final payment is made and the contract ends. As with a PCH, you can simply hand the keys back and walk away, in which case you will have been effectively leasing the vehicle. Or you can make the agreed-upon balloon payment and become the full owner of the vehicle. Depending on the terms and conditions of the PCP it may also be possible to refinance so that you can enter into a new contract and drive another brand new vehicle.
The monthly instalments relating to a PCP are often lower than they would be for an HP agreement. Plus, it delays your having to commit to becoming the full owner of the vehicle. Something you may not want to do if, for example, you are planning to mainly use it for the school run for older kids who will soon be going to college. If they decide to use public transport to get to college you can decide not to make the balloon payment and hand the keys back. That way you won´t be stuck with owning a car that is rarely used.
Use a car finance calculator to compare deals
Regardless of which of these two forms of finance you choose most dealerships will be able to arrange it for you. This makes things easier, but it does mean that there is a risk that you will end up paying more for your vehicle than you need to.
Fortunately, shopping around yourself is not difficult. It does not take long to key your details into a car finance website and compare what is on offer from a range of different companies.
Just make sure that it is a car finance calculator that you are using to do this. You don´t want to be filling out an actual application. This is because making multiple credit applications can harm your credit rating. Not to mention the fact that filling out multiple full applications would be very time-consuming.
The above overview of modern vehicle financing should have answered most of your questions. If after reading this and speaking to some loan companies things are still not clear, do some further research. You don´t want to inadvertently sign up for a financing agreement that ultimately does not suit your needs. People who do this tend to find that they have made a costly mistake.
