Finance

Finance Explained

• Hire Purchase (HP)

  If you choose to pay for your car with a Hire Purchase agreement, you will normally pay an initial deposit and will pay off the entire value of the car in monthly instalments. When all the payments are made, the Hire Purchase agreement ends and you own the car.

  PROS

  • You’ll be able to drive away a car that you may not have managed to buy outright
  • Unlike a PCP or PCH contract, you won't need to estimate your mileage at the start of your Hire Purchase agreement, so you'll avoid excess mileage charges
  • Once you’ve made your final monthly payment, including the option to purchase fee, you'll have full ownership of the car.

  THINGS TO BEAR IN MIND

  • Monthly payments may be higher than some other finance options, such as PCP, as you're paying off the full value of the car
  • You won’t be able to sell the car without settling the finance
  • You won’t own the car until you have made all of your repayments
  • You’ll need to keep the car properly insured, maintained and in your possession until the full value is paid off
• Personal Contract Purchase (PCP)

  Personal Contract Purchase (PCP) is similar to a Hire Purchase agreement as you will usually pay an initial deposit, followed by monthly instalments.

  What makes PCP different is that your monthly instalments are paying off the depreciation of the car, and not its entire value, over the course of the term. Then, when you get to the end of your agreement, there is a final, balloon payment that must be made if you want to keep the car.

  HOW DOES PCP ACTUALLY WORK?

  At the start of your PCP contract, a Guaranteed Future Value (GFV) of the car is set. This is the car's expected value when your contract ends.

  For you, this means that the money you’re repaying is the difference between what the car is worth now and what it will be worth at the end of your contract (the depreciation) plus interest, which is calculated on the full value of the vehicle. You'll pay this difference off in monthly instalments.

  Remember: you are still liable for the full amount of the vehicle if anything happens to the car or if you settle early.

  This means lower monthly payments for you, but you will need to pay a final payment at the end (the Guaranteed Future Value) if you want to keep the car.

  Once your agreement is finished, you’ll have three options:

  1. Buy the car by paying the final balloon payment (the Guaranteed Future Value)
  2. Hand the car back - your finance company has already predicted the Guaranteed Future Value of the car, so handing the car back will settle the deal
  3. Part exchange for a new car

  PROS

  • Monthly payments on a car financed by PCP are usually lower than if your car is financed by a Hire Purchase agreement
  • If you decide not to buy the car, you can simply walk away when you've made all the payments
  • Similar to PCH, you can drive away a new or used car every few years (dependent on the chosen term) without worrying about selling it on
  • If your car is worth more than the Guaranteed Future Value then you can use that equity towards a deposit on a new car

  THINGS TO BEAR IN MIND

  • If you want to buy the car you will need to pay your final balloon payment (the Guaranteed Future Value)
  • Similar to a Personal Contract Hire ( PCH ) , you will need to agree on a mileage allowance at the beginning of your contract and there may be excess mileage charges if you exceed this
  • You won’t be able to sell the car without settling the finance
  • You won’t own the car until you have made all of your repayments
  • You’ll need to keep the car properly insured, maintained and in your possession until the full value is paid off

  CAN I SETTLE MY PCP DEAL EARLY?

  You can normally settle your deal early, however the finance company will require you to pay off the difference between what your car is worth now, and what you still owe (negative equity). On the other hand, you may find that at the end of your term your car is worth more than the Guaranteed Future Value, which means you’ll have some positive equity to contribute towards your next car.

• Lease Purchase (HP)

  Lease purchase works very similarly to PCP and is in essence the same concept. The major difference between the two is that the balloon payment is not a guaranteed future amount where you can simply hand the car back to the lease company.

  PROS

  • You can have a lease purchase for business use which makes the monthly payments lower. In the past business purchases, have been done through hire purchase which has realised higher payments
  • You can purchase slightly older cars outside the parameters of PCP which gives slightly lower payment than hire purchase
  • Once you’ve made the final payment you own the car outright