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.
Still need a few things clearing up? We’ve collected the car finance questions we get asked about the most for you here…
Can I get car finance with bad credit?
If you’re applying for finance with bad credit history, then it might mean that some lenders won’t offer you the money you’re looking for. This is because they’ll see you as being less likely to make payments.
That said, you can still get car finance with bad credit, you just need to be more realistic with your needs. Be sensible with your next choice of car (so no imported classic cars), make sure you’re able to repay (which will help to boost your credit score), and get into the habit of paying back any loans and settling any debts.
Keep in mind too, that if you are accepted, then there’s a chance that you’ll probably have to pay a higher interest rate too.
Can I sell a financed car?
Yes, you can. Technically, you don’t have the right to sell it since a car under finance belongs to the finance company. However, major car dealers can easily settle the finance on a car that’s still under contract – so you can easily get out of your current deal.
You’ll need to ask your current finance company for a settlement figure, which they have to provide within 12 days. This figure is then valid for 10 days, in which time you’ll need to pay off that amount and sell your car. The money from the sale can then be used to settle the finance.
It sounds like a bit of a difficult process, but car dealers know the ins and outs of the process, and can help you get everything sorted smoothly.
Can I get car finance without a licence?
Surprisingly, you do not need a full driving licence to apply for finance. Obviously, you’ll still need a full licence if you intend to drive the car itself.
Can you transfer car finance to another person?
Since car finance is tailored to everyone’s individual circumstances, it’s not possible to transfer an existing car finance agreement to someone else. It’s unlikely that someone will have the exact same circumstances as you.
Can you have two cars on finance?
You can. In fact, there’s no limit on how many cars you can have on finance at any one time. It all depends on your individual circumstances, credit history and affordability, of course, but it’s possible for people to have two, or even three, car finance agreements in their name. With that said, finance providers have to be responsible with their lending to make sure that borrowers can realistically pay back on the loans they take out.
Can you finance an EV?
You can finance an electric car just like you would with any other type of car finance.
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