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Hire purchase is one of the most popular types of vehicle finance in the UK and is ideal for consumers wanting a simple agreement with fixed monthly payments that allow for ownership of the vehicle once all payments have been made.
A hire purchase agreement works by offering you a secured car loan against the vehicle that you are purchasing.
In simple terms you are hiring the vehicle off the lender and paying a fixed monthly payment (including interest) over an agreed term. Once all of your monthly payments and the option to purchase fee has been paid in full you will then be the legal owner of this vehicle.
Personal contract purchase otherwise known as PCP is similar in principle to a hire purchase product, however it actually works more like a leasing product.
Instead of paying off the entire value of the car in monthly instalments you are effectively only paying off the cars depreciation, hence the lower monthly payments. At the end of your PCP agreement there will be a lump sum outstanding which is commonly referred to as the balloon payment.
You will have several options as to how you would like to deal with this final amount, depending on whether or not you want to keep the car or change it.
Lease purchase works in a similar way to hire purchase. It requires you to make monthly repayments but also allows you to defer part of the total cost of the car to back end of the agreement, called a balloon payment.
Up to 31% of the total cars value can be deferred – this is usually calculated on the cars residual value and in order to settle the lease the balloon payment must be paid. This lump sum can either be paid off in cash or re-financed on a standard hire purchase product.
As with most leasing products a maximum mileage limit will have to be agreed from the outset as this is what the lender will use to determine the residual value of the vehicle at the end of the contract.
Contract hire is the most common form of leasing and must not be confused with a car loan. Contract hire is where you simply hire the vehicle from the leasing company over a set period. In that period it’s yours to drive around in, however you will never have the option of owning it.
Take your time. Before signing any finance agreements, ensure you read them through and fully understand the agreement. Don't feel embarrassed if you don't understand some aspect of a car finance agreement. Any questions you have should be answered with ease by the dealership, the broker or the lender that is providing the application form.
Check the finance agreement for additional charges such as early repayment penalties, balloon payment and/ or any final payments. These can add up and be an unexpected cost.
All finance agreements should be issued by an authorised car dealer which clearly shows their Financial Conduct Authority (FCA) details.
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All finance companies will check your credit history using a credit agency, such as Experian, Equifax or CallCredit. Your credit history is a complete record of the finance agreements you currently have and have had in the past, as well as applications for credit that you have made.
The more positive your credit history is, the more likely you'll be able to secure a finance agreement.
Most headline offers are based on a good credit history. If your credit history isn't classed as ‘good' the finance rates you are offered could be different resulting in higher monthly payments or a larger required deposit.
Having an adverse credit history or high outstanding credit could result in you not being approved for vehicle finance. In addition, providing incorrect information during the application process is deemed as fraud. This can affect future applications.
Car finance is a credit agreement made between you and the lender which allows you to buy a car.
Annual percentage rate (APR) is the interest rate applied to your loan. It is the yearly cost of your borrowing - you'll pay this on top of the sum you applied for. If you take out a long-term loan, the total amount payable will be more as you'll be paying interest for a longer amount of time.
Representative APR is the figure companies use to advertise their rates. Once a credit check has been taken into consideration, the lender will decide whether you're eligible for the representative rate or a different rate.
By law only 51% of people are actually required to receive the advertised rate. So once your information has been checked, you will ultimately get your exact APR - which will be the amount you actually end up paying.
It will almost always be cheaper to buy a car with cash, and you should always make sure you add on your APR when calculating the cost of a car finance deal. For example:
"Imagine a £10k car bought on finance over 12 months. It might sound great if you're offered £1,000 off the ticket price, but if you're given a loan with an APR rate of 25% when you could have got a 5% loan then you'll still be out of pocket overall due to the difference in interest (by £750 to be precise - £11,250 vs £10,500)"
The cheapest option would usually be a personal loan. There is no end of agreement charges for any damages or going over your agreed mileage, and the car is yours from right at the start of the agreement.
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