Although the different car payment methods may seem a little confusing at first, they are structured in a way that may help your budget go a little further. By picking the type of car financing that best suits your financial situation, you may be able to afford a model that you thought was well out of your budget.
To help you make the all-important decision of how you’re going to pay for your car, be sure to check out this guide to all-things car finance before you sign on the dotted line.
Hire Purchase (HP) is a finance agreement that involves paying an initial deposit, although some lenders do not require a deposit, after which a finance company hires you the vehicle for the period of the agreement and then sells you the car for the Optional Final Payment, usually just £10, when all the contracted payments have been made. The amount financed is paid back in fixed monthly instalments over an agreed period; the deposit size and monthly payment amount will be determined by the cost of the car, the interest rate (APR) and the length of your agreement.
After the agreement has been paid off, the car is yours outright. This means HP agreements don’t include any terms and conditions regarding mileage or wear and tear.
If you want to eventually own the car, and you have a budget that suits fixed monthly repayments, then a Hire Purchase is potentially a good idea. Likewise, a disposable income that’s unlikely to decrease over the agreement term will stand you in good stead.
Also known as leasing, Personal Contract Hiring (PCH) is much like renting a vehicle when you’re on holiday – just for a longer duration of time. You’ll pay a sum up front, followed by regular monthly payments before you give the car back.
You’ll sign a contract with the lease provider in order to determined how many miles you can cover along with the size of your monthly payments, which is usually calculated as a multiple of the monthly payments.
If you don’t want to own a car, like to be able to change vehicles at fixed intervals, PCH is a good idea. Additionally, if you’re the kind of person who likes driving cars that you wouldn’t normally be able to afford, then this may be the finance option for you.
Similar to the above, a Personal Contract Purchase (PCP) involves an initial deposit, a series of monthly payments and the return of the car to the finance company, provided it’s in a reasonable condition for its age and mileage.
This time around, however, if you decide you want to keep the car, you’ll have the option to buy it outright in return for the final payment, also known as a “balloon payment”.
This price, along with the monthly amount, depends on the size of the deposit, the cost of the car, its interest rate and how much the finance company calculates the value to be at the end of the agreement. This amount is known as the Guaranteed Minimum Future Value (GMFV).
A PCP contract will usually set out the expected condition of the car upon return, as well as how many miles you’ll be allowed to cover.
If you’re looking for lower monthly payments than other financing options, but also like the flexibility once you’ve reached the end of your agreement, then opt for the PCP option. Likewise, people who are confident of the mileage they’ll rack up and can accurately determine how much they’ll need would do well to go for it.
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