Finance advice

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What is Hire Purchase (HP)?

Hire Purchase (HP) is the most popular form of financing a vehicle and is viable for new and used cars. It involves you hiring a vehicle from a finance company for an agreed time period (between 1 and 5 years). You will also need to put down a deposit, usually around 10% of the total value of the vehicle.

You and the finance company will agree the initial and monthly payments and the length of the loan. APR rates for HP range from 5.9% up to 50% but with our Finance partners, CarMoney, you’ll never get a rate higher than 39.9%. Only once the final payment is made is the car yours. If you fail to keep up with repayments, the lender has the right to take the vehicle back.

Benefits

  • Flexible repayment terms (from one to five years) although, the longer the term, the more you pay in interest.
  • Relatively low deposit.
  • Fixed interest rates so you always know what you are paying month on month.
  • It does not usually come with mileage restrictions.
  • It is usually easier to get accepted for HP if you have a lower credit score, as the car can be used as collateral.

Reasons to choose another product

  • You will not own the car until you have made the last payment.
  • Monthly payments are usually slightly higher than for PCP.
  • More difficult to end the agreement early.

Example

Car priced at £25,000:

  • Deposit £1,000
  • APR: 6.9%
  • Term: 60 months (5 years)
  • Monthly payments: £471.74

What is Personal Contract Purchase (PCP)?

PCP is basically a loan to assist with buying a car. The big difference from hire purchase is that you won’t be paying off the full value of the car and you won’t own it at the end, unless you pay the balloon payment. It can be broken down into three parts:

  • Deposit: Usually around 10% of the vehicle’s value. The larger the deposit, the less you’ll have to borrow.
  • Balance to finance: This is based on how much the finance company predicts the car will lose in value over the term, minus the deposit you have put down.
  • Balloon Payment: Also referred to as the Guaranteed Future Value (GFV), this is how much the dealer expects your car to be worth after the deal ends, agreed at the start. You don’t have to pay this, only if you want to keep the car.

The real benefit of PCP comes for people who want to change their car more often, as you can just hand the car back, or, if the car’s value is higher than the balloon payment, you can use what is called the ‘equity’ as a deposit on another car. For example, if the car’s actual value was £9,000 and the balloon payment is £8,000, you have £1,000 of equity to use as your next deposit.

You don’t have to worry about the car being worth less than the balloon payment unless you’ve not looked after the car properly or damage it more than expected! If you do decide to hand the car back and walk away, do be conscious that you could be charged extra for any milage over the set limit you drove or damage charges to the car itself.

Benefits

  • Lower monthly payments.
  • Can get a newer car for a lower payment compared to HP.
  • Flexible options at the end of the agreement.
  • A specified Guaranteed Minimum Future Value (GMFV), therefore protecting you from market fluctuations.
  • Ability to change car more regularly.

Reasons to choose another product

  • If you exceed the anticipated annual mileage there may be an excess mileage charge at the end of the contract.
  • The load is still secured against the vehicle as such if you miss payments then the vehicle may be repossessed.
  • You will not own the car until you have paid the final balloon payment.

Considerations Before Signing

Do you have the income to keep up repayments?

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. Think a few years ahead, will you still have reliable income enough to keep the payments up?

Will I get approved?

All finance companies will check your credit history using a credit agency, such as Equifax. 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.

If you have always been on top of repaying loans/credit cards then you needn’t worry too much. Even if you don’t always get payments in bang on time, you will probably still get accepted, but with higher interest rates. It is important to bear in mind you will be paying more to finance a car if you have a lower credit score.

FAQs

What is car finance?

Car finance is a credit agreement between you and the lender which allows you to buy a car. Usually lasting from 1 to 5 years depending on what you can afford to pay monthly.

What is Leasing?

This option means you are renting the car and therefore will never have ownership of the vehicle. Unlike PCP you won’t have the option to buy the car at the end of the contract.

Can I part-exchange my car as a deposit?

Yes, finance companies as well as online valuation providers will allow you to agree a price for your car and have it collected from your driveway with nothing else needing done by yourself. As long as you describe the car correctly then the agreed amount will usually be in your account that day or taken against your new vehicle.

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