Car finance is one of the most popular ways to purchase vehicles in the UK, with Brits pouncing on benefits like low interest rates, affordable monthly repayments and flexible terms. While all types of UK car finance are designed to get you behind the wheel of a new car faster, there are some important differences to understand before you commit to a contract. With a good grasp on car finance types in the UK, you can get the most out of your loan and enjoy all the benefits, with zero stress.
1. Hire Purchase
Hire purchase (HP) is one of the simplest UK car finance types. It allows you to spread the cost of the vehicle over a set period of time, with repayments usually made monthly. At the end of the loan, you’ll own the car outright, with nothing more to pay. Deposits aren’t always required, though they can help reduce your interest rate and monthly repayments.
To calculate the total cost of your loan, simply take the price of the car, minus the deposit and add interest. You may also be liable for administration and transfer rights fees at the end of the loan, which are worth factoring in. Most HP agreements span for between three to five years, although this can vary. Monthly payments are fixed, making it easy to budget and plan around your loan.
2. Conditional Sale
Similar to hire purchase, conditional sale loans are a great option if you want to own the car at the end of the contract. Payments are a little higher though there are no additional fees at the end of the loan. Deposits are usually 10% of the car’s value and repayment terms can be anywhere from two to six years, allowing for plenty of flexibility.
3. Personal Contract Purchase
Personal contract purchase (PCP) is one of the most popular types of UK car finance and for good reason. Monthly payments are lower than HP loans, which allows you to consider newer, higher spec vehicles without blowing the budget. You may need to make an initial deposit worth around 10% of the car’s value, and then you’ll continue to make repayments over the lifetime of the loan, usually between two and four years.
When you’ve made your final instalment, you have the option to make a ‘balloon payment’ to gain ownership of the vehicle. Alternatively, you can swap the car for a new model, making PCP loans popular with motorists who covet the latest bells and whistles.
Most PCP loans require you to estimate your expected annual mileage, which is used to calculate Guaranteed Future Value (GFV). This figure predicts the value of the car at the end of the loan. If you go over your mileage limit you may incur penalties as this reduces GFV.
4. Personal Loan
Personal loans see you borrow the total amount needed to purchase a car, then pay back the amount in monthly instalments, plus interest. You’ll own the vehicle outright, which makes this option appealing to motorists who want complete freedom when it comes to mileage, wear and tear, customisation and other liberties. You’re also free to sell the car at any time. Borrowers with good credit profiles can generally unlock the best interest rates and loan terms.
5. Guarantor Loan
For borrowers with bad credit, guarantor loans are one of the most appealing car finance types in the UK. A third party, usually a family member, agrees to ‘guarantee’ the loan and step up if you can’t make repayments. It’s a big responsibility for both you and the guarantor and so shouldn’t be entered into lightly.
6. Personal Contract Hire (PCH)
Also known as leasing, personal contract hire allows you to rent a vehicle for the lifetime of the agreement. Contracts start with an initial cash deposit followed by monthly payments to cover the cost of the lease. The value of your monthly payments is determined using your expected annual mileage and the length of your lease. This is because both variables play a big role in the value of the vehicle at the end of your contract.
At the end of the agreement, you return the car to the dealer, with no option to purchase it outright. Most people choose to start a new PCH contract, which gets you the keys to a brand new vehicle. If you love fresh leather seats, cutting-edge technology and that sought-after new car smell, you’ll love PCH loans. You’ll also sidestep depreciation, as well as enjoy perks like breakdown cover, waived road tax and complete coverage under the manufacturer’s warranty. For legions of motorists, the hassle-free nature of PCH makes it one of the most desirable UK car finance types.
Crunching the numbers
Whether you’re attracted to the freedom and flexibility of hire purchase or love the idea of continually upgrading to new vehicles with a PCH contract, it’s important to crunch your numbers before committing to car finance.
Your initial cash deposit isn’t the only factor to consider when asking can I afford to buy a car? Financial factors like your credit score and borrowing history can influence how much lenders are willing to offer. You’ll also need to factor in variables like your preferred loan term and your budget for monthly repayments.
Choosing between car finance types (UK)
With a good understanding of the different types of car finance in the UK, you can choose the best options for your unique situation. It’s always good to have experts on your team, which is where My Car Credit comes in. Armed with a wealth of knowledge and experience, plus access to one of the largest panels of lenders in the UK, we help you narrow down your search and secure the best loan terms and interest rates.
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