Buying a car on finance: what are your options?

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Buying a car can be a stressful process, not only finding the car you want to purchase, but also how you decide to pay for it. There are various types of finance available that each have their benefits and drawbacks. The most popular car finance option is personal contract purchase (PCP), however hire purchase (HP) and personal contract hire (PCH) have also grown in popularity in recent years. It is also important to carefully consider the finance options available, and whether you can afford the monthly repayments before signing on the dotted line.

What are the most popular car finance options?

Buying a car can be a stressful process, not only finding the car you want to purchase, but also how you decide to pay for it. There are various types of finance available that each have their benefits and drawbacks. The most popular car finance option is personal contract purchase (PCP), however hire purchase (HP) and personal contract hire (PCH) have also grown in popularity in recent years. It is also important to carefully consider the finance options available, and whether you can afford the monthly repayments before signing on the dotted line.

Personal Contract Purchase

If you finance a car through PCP, the finance company will own the car whilst you are making the monthly repayments, with terms usually ranging between 24 and 60 months. At the end of your contract period, you will have a number of options:

  • Return the car to the finance company
  • Pay the balloon payment agreed in the contract if you want to own the car
  • Use the equity in your vehicle as a deposit for another car
  • Sell your car and use the equity to pay off the remaining finance

PCP deals will require you to pass a credit check to ensure you can afford the monthly repayments for the length of the contract, and you’ll usually have to pay a deposit. Dealerships may offer to pay a ‘deposit contribution’ which will reduce the deposit required from the customer, however this may come at the expense of other incentives, such as lower APR. It is recommended that you pay a larger deposit, which may result in borrowing less and the overall cost of the finance being lower.

If you choose to return your car at the end of the agreement, any dents, scrapes, or other damage outside of what is considered ‘general wear and tear’ may be chargeable at the dealerships rate. Also, if you return the car above the specified mileage in the contract, you will incur additional fees per mile. All of these potential charges will be outlined in the terms and conditions of the PCP agreement.

Pros

  • Monthly repayments are lower than hire purchase and personal loan agreements
  • You don’t need to worry about the depreciation of the car
  • You can drive a car which you might not be able to afford otherwise
  • You have a number of options at the end of the agreement

Cons

  • You will be charged if you go over the agreed mileage limit
  • You’re liable for any excess damage which is beyond general wear and tear
  • You don’t own the car during the contract period
  • You will need to pay a balloon payment if you want to own the car
  • A deposit is usually required for PCP agreements

Hire purchase

Hire purchase is a finance option which has grown in popularity in recent years. Financing a car through hire purchase is similar to getting a personal loan, but instead of owning the car from the offset, you are hiring it for the duration of your contract. At the end of the agreement there is a small ‘option to purchase fee’ where the ownership is transferred from the finance company to you.

Typically, hire purchase interest rates are similar to that of a personal loan, but the debt is secured against the car rather than your assets. This means that if you are unable to pay the monthly payments, the finance company could repossess the car to pay off your debt. As such, this reduces the risk for the lender.

If you know you want to own the car at the end of the agreement, you would probably choose HP over PCP as you are making regularly monthly payments rather than having to pay a balloon payment at the end of the contract. APR is also generally lower than that of an equivalent PCP deal.

When choosing HP to finance your car, you should also be aware that you are able to return the car once you’ve paid off half of the debt due to a clause in the Consumer Credit Act. You may want to return the car if it is no longer required, the monthly payments are causing a burden on your finances or if you have found a similar car with lower monthly payments. However, if you do choose this option, you will be liable for any damage to the car beyond ‘general wear and tear’.

Pros

  • You own the car once all payments have been made
  • You are more likely to be accepted on a HP agreement than a personal loan
  • You can choose your deposit contribution to reduce the overall cost
  • Terms are available from 1 to 5 years to meet your requirements
  • You can return the car after 50% of payments have been made
  • Most manufacturers and dealerships will arrange the finance agreement

Cons

  • You are only hiring the car until all payments have been made
  • The car can be repossessed if you fail to make the monthly payments
  • Monthly payments are higher than PCP and PCH agreements
  • You can’t sell the vehicle until the end of the agreement without permission of the finance company

Personal contract hire

Personal contract hire (PCH) is where you rent a car for a long period, usually of 24, 36 or 48 months. PCH is popular with motorists who want to get a brand new vehicle without a large deposit. At the end of a PCH agreement, you simply hand the car back to the finance company and there is no option to purchase, which means you don’t need to worry about the depreciation and you can get a new vehicle every 2-4 years depending on your term. In certain cases, you can choose to extend your PCH agreement for a specific length of time at the discretion of the finance company.

With a PCH agreement, you will be expected to pay a deposit equal to 1, 3, 6 or 12 months of the monthly payments, and make regular monthly payments for the duration of your contract thereafter. Many motorists opt to add a ‘maintenance agreement’ to their lease, which covers costs such as new tyres, servicing, glass damage, minor scratches and annual car tax.

Whilst personal contract hire has grown in popularity, it probably wouldn’t be a viable finance option if you travel a high number of miles per year or want the flexibility of being able to terminate your agreement early. You also won’t be the registered owner of the car, and must have comprehensive car insurance for the duration of the contract. When you hand the car back, you will need to ensure the car is in good condition, as you will be charged for any damage which is considered above ‘general wear and tear’.

Pros

  • You have fixed monthly payments for the duration of your contract
  • You don’t need to worry about depreciation of the vehicle or the hassle of selling
  • You have the opportunity to drive a vehicle that might not be obtainable without PCH
  • Agreements can include maintenance packages, which means you don’t have to worry about costs for servicing, tyres, annual car tax etc.
  • You have the flexibility of changing vehicles every 2-4 years

Cons

  • You will have to pay charges if you go over the mileage limit set out in the contract
  • You will be charged at the end of your agreement for any damage which is deemed above 'general wear and tear'
  • You don't have the option to own the vehicle at the end of your contract
  • You must have comprehensive insurance for the duration of the agreement

Personal loan

If you don’t have savings to purchase a car, a personal loan could be a viable option if you want to own a car outright from the offset, unlike PCH where you only own the car once you have paid all of the monthly payments. If you choose to opt for a personal bank loan to purchase your next car, you can become a cash buyer, which may help you negotiate a better deal.

You will benefit from the flexibility of owning the car outright, therefore you can simply sell the car at any point to pay off the balance. However, you could be affected by depreciation, meaning the car is worth less than the outstanding loan balance. But, you won’t have mileage limits and won’t have to worry about additional charges returning a vehicle as you would with PCP and PCH agreements.

To get a personal loan with a low APR you will need to have a good credit rating, and unlike hire purchase, the debt will likely be secured against your assets rather than the car. This increases the risk if you are unable to meet the monthly payments of the loan.

Pros

  • You will own the car
  • You may have more bargaining power dealing in cash
  • You won’t have a limited mileage allowance and won’t be charged for excess damage

Cons

  • The loan may to be secured against your assets
  • The car will be affected by depreciation
  • Monthly payments can be higher than a PCP and PCH agreement
  • You need to have a good credit rating to get a low APR loan

What is the best car finance option?

There isn’t a one-size-fits-all approach for car finance, and the finance option you choose will depend on your current situation and requirements. If you want to change your car every few years, you might want to opt for PCP or PCH finance, whereas if you want to own the car outright you could consider HP or a personal loan.

If you own your current car, you may be considering selling your car to part-finance a new vehicle. You can check the value of your car using our quick online tool and get a valuation within 30 seconds.

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