A number of factors have seen the amount of people able to pay in full for a new car declining sharply in recent years.
The global financial slowdown, resulting recession and widespread pay freezes have made people less able than ever before to be able to save enough to purchase a new car. Ultimately, people are turning to finance options in order to buy their new set of wheels, but there is confusion amongst consumers over what these options are and their long term effects.
When buying through finance from a car dealership, you will generally have two options – a straightforward hire purchase (or HP) agreement and a personal contract purchase (generally abbreviated to PCP). Whilst both of these options allow you to enjoy driving a new car whilst paying in monthly instalments, there are a range of differences between the two finance types, which means that one may suit you more than the other, depending on your personal circumstances.
If you purchase a car using an HP agreement, you will be paying off the total cost of the car over an agreed payment term. This is usually in the region of around 60 months (five years) but varies depending on the value of the car and your own financial constraints. The price paid over the term of the agreement will include interest payments, but this will generally be at a lower rate than if you took out a personal loan yourself. The main reason for this is that an HP is considered to be secure finance. This means that the finance is secured against the car itself.
You will not legally own the car (despite being named as the registered keeper on the V5C certificate) until you have made the final payment, as ownership is retained by the lender. If payments are missed, the car can be repossessed, so it is wise to consider carefully the level of finance you wish to take on, ensuring that your finances are not overstretched.
The advantages of HP plans include the fact that they are cheaper than personal loans, generally speaking, and that they are a more economical long term option to owning a car outright than a PCP agreement. On the other hand, the monthly payments are likely to be higher with HP than with PCP, and your finance will be secured against the car.
Personal contract purchase
A PCP works in a similar fashion to an HP agreement, where you pay off the car in monthly instalments. At the end of the contract term, you have a decision to make: either pay a final lump sum payment to own the car outright or walk away owing nothing and begin again. Your lender will estimate the value that the car will have at the end of your PCP term, deducting this and the deposit made from the total price of the car. This value will then be used to calculate the monthly payments to be made.
PCPs have far lower monthly costs than HP finance and come with great flexibility. You can choose how long the contract is to be, how much or little you are able to put down as a deposit, and the mileage you are likely to do. The fact that the final payment is not factored into monthly payments also means that any risks of depreciation are carried by the lender, rather than yourself. At the end of the contract, you will have to pay the remaining balance on the value of the car or walk away. Those who choose to own the car outright tend to end up paying more than if they had taken HP in the first place.
A third option is to simply lease the car over a contract time period. Usually, a contract hire term is between two and four years and would come with far lower payments than an HP or PCP term. Another benefit of this method is the fact that maintenance costs can be added to your monthly payment, meaning that you will never have a nasty financial surprise should something go wrong with the car. At the end of the term, you either hand the car back or swap it for a newer model, but you will never own the car using this method.
This guide was brought you by Louis Rix, Director at www.carfinance247.co.uk. Why not vist them to find more motoring news and advice.
If you have any “car financing tips” then please share what you can in the comments section below.
- Have you used finance for a car before?
- What has your experience been with car finance?
- Do you have a dream car, if so what!?
- Which one of the three options would you pick?
- Have you struggled with making car payments before?
- Included car maintenance, peace of mind or not?
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