The Car Financing Guide: Get to know

Considering financing your new vehicle? get to know the ins and outs of motor finance.

Tuesday 31st of January 2023 12:00 GMT

3.5 minute read

In this informative article we will breakdown the ins and outs of car financing so you can make an informed decision when it's time to change your car.

The Car Financing Guide

Are you considering applying for finance? Understanding the ins and outs of car finance is essential before you make your decision. This article will provide an introduction to car finance.

It is important to check the regulatory status of any firm offering financial products. All firms offering finance must be authorised by the Financial Conduct Authority (FCA) and have a Consumer Credit License (CCL). You can check the regulatory status of a firm here:

https://www.fca.org.uk/firms/financial-services-register

For those considering the purchase of a car, understanding the financial commitments involved can be daunting. Fortunately, many car companies now have finance calculators on their websites, which can help prospective buyers to accurately estimate their costs and payments in advance, before undergoing any credit checks.

These finance calculators take into account factors such as credit score and other relevant financial information, such as deposit and term of agreement, allowing customers to make informed decisions about purchasing a car before committing to any contracts.

When it comes to car finance, two of the most popular finance options are Personal Contract Purchase (PCP) and Hire Purchase (HP). Both offer the potential to drive away in a new car quickly with competitive rates of interest and flexible payment plans. But which is best for you? The following article looks at PCP and HP in more detail, so you can make an informed decision when selecting car finance.

Personal Contract Purchase (PCP)

This type of car finance is particularly suited to those who like to change car every few years. With PCP, you pay a deposit followed by monthly payments over an agreement term. At the end of the agreement, you have three options: keep the car, return the car to the finance company, or part exchange the car.

The main benefits of PCP are that you can finance a car with lower monthly payments than HP and flexibility. The down side is that at the end of your finance agreement you must pay the 'balloon payment' if you choose to own the car outright.

Pros:

  • Lower monthly payments.
  • Ability to buy a higher priced vehicle, that otherwise might not be affordable.
  • Flexible repayment terms.

Cons:

  • Large balloon payment at the end of the agreement should you choose to keep the car.
  • You will not own the vehicle unless you pay the balloon payment
  • Mileage restrictions may apply.

Hire Purchase (HP)

Hire purchase is a very popular way to finance a car. As with PCP, with HP there is a deposit followed by monthly payments for the agreed term. However, at the end of the agreement you will own the car outright.

The upside to HP is that there is no balloon payment once agreement ends. The downside is that the monthly payments tend to be higher than PCP.on

Pros:

  • HP finance provides customers with flexible payment options and allows them to spread the cost of expensive purchases over a period of time.
  • There is no large payment at the end of the agreement.
  • You will own the car outright once the agreement comes to an end.

Cons:

  • The loan is secured against the vehicle: The vehicle can be repossessed if payments are not kept up.
  • Non-payment can negatively affect your credit rating.
  • The finance company are the legal owners of the vehicle until the agreement is paid in full
  • The rate of interest will vary subject to status, which will reflect the level of risk to the lender. Previous poor credit will represent higher risk and a higher rate will be charged

Conclusion

Both PCP and HP have their merits, so it’s worth taking the time to work out which option suits your particular needs the best. If you want the freedom to upgrade to a new car every few years, then PCP could be the right choice. If you want to keep the car at the end of the agreement and don’t mind higher monthly payments, then HP could be a better option.

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