How to Decide What Kind of Car Finance is Best for You

Buying a car outright often isn’t an option for most people looking for their next vehicle, which is why car finance is quickly becoming the favoured choice.

However, with several choices on the market it can be difficult to sift through the jargon and confusing finance terms. This is exactly why we have created a short guide on the three most popular car finance options.

Hire purchase - HP

Perhaps the most common form of car finance and one that a number of vehicle owners opt for is hire purchase.

In short, the amount of money that you need to borrow is split across a set time frame, often this is across 3-5 years or in some cases the timeframe is broken down into 26-60 months. Depending on your credit rating in some circumstances a deposit isn’t required.

To work out the monthly repayments, the total loan and the interest are added together and this is divided by the number of months and years payments need to be made. The key factor about hire purchase is that once the final payment has been made, you own the car.

Personal Contract Purchase - PCP

Similar to a Hire Purchase agreement, a Personal Contract Purchase is where the car can be fully owned at the end. However, the full balance is not always paid in monthly installments, instead there is the option to defer the balance until the end of the agreement (which can range from 24-60 months), sometimes this is also referred to as a balloon payment or a guaranteed future value.

At the end of the term there are three options:

  1. Pay off the remaining balance at the end of the term and own the vehicle
  2. Give the vehicle back to the finance company
  3. Sell or part-exchange the vehicle, make the final payment to the finance company and keep any remaining money as a deposit for your next car

There are a few ways in which the monthly re-payments can be lowered, for example deposits on a PCP can range from zero to whatever amount you would like to put down. The higher the deposit, the lower the monthly repayments.

The estimated mileage can also affect the total amount that needs to be paid. However, be careful when estimating your mileage as if this is exceeded the finance company may add an extra charge at the end of the term, only if you exercise the right to hand it back. It makes no difference when trading the car in other than its value or if you pay the finance off.

The vehicle must also be kept in a decent condition as failure to do so can result in added charges.

Personal Contract Hire – PCH

Unlike the previous two options you do not own the car at the end of the agreement. A PCH is like hiring a rental car - installments are made but at the end of the term the car must be returned.

Rentals must be paid in advance, similarly to a deposit, the more rentals that are paid the lower the monthly instalments.

As the car is never yours, when it is returned at the end of the agreement the company will check the vehicle for any damage. If there are any problems with the car, other than general wear and tear, extra charges will be added to the final payment.

If you wish to change your car during the PCH a termination fee will need to be paid, which will result in you having to pay for the car even though it won’t be yours at the end of the term.

Making the choice between HP, PCP, PCH

Each finance option has their own pros and cons and each person will have their own requirements which are best suited to one of the above options.

We hope that this article has moved you a step closer to making a decision on car finance however, if you are still unsure about the best vehicle finance option for you, our team would be more than happy to help.

To speak to one of our experts, call our team on 01592 655550.