What Does ‘Finance’ Mean When Buying a Car?

This post aims to help you get to grips with what different types of finance actually mean when buying a car, and how they work. Once you’ve understood the different kinds of agreements available, you’ll be on your way to securing a car loan quote that will work for your circumstances.

So, what does ‘finance’ mean when buying a car? Read on to learn more…

What does ‘finance’ mean when buying a car?

In essence, car finance makes the purchase of a car more affordable. It’s a credit agreement between you and the lender, allowing you to make full use of the vehicle whilst paying it off in cost-effective monthly instalments according to a pre-agreed schedule. The amount you pay off will also include additional interest on top.

What are the different kinds of car finance?

The right car finance for you will depend on the kind of agreement and terms that you’re looking for, as well as your own driving preferences and needs.

Car loan

A car loan is a type of personal loan but is specifically designed for use on vehicles.

With a car loan, you borrow the money from either a bank or building society. Once you’ve bought the car, you are its outright owner. You’ll repay the car loan over time via instalments, with added interest. Typically, a car loan is more likely to be granted to those with a good credit score – there are other kinds of car finance available for those with poor credit ratings.

Personal Contract Purchase (PCP)

Do you like mixing up the vehicles you drive? Are you happy sticking to mileage caps or paying excess fees for any vehicular wear and tear? Would you like flexibility in choosing whether or not to own the vehicle at the termination of the agreement? Then PCP is potentially the car finance for you. In fact, PCP is the most popular kind of car finance because of its low monthly repayments and flexibility.

With PCP car finance agreements, you’ll pay a deposit and monthly instalments (plus interest). The larger your deposit is, the lower these payments will be. These payments are typically lower than other kinds of car finance as you’re only paying for the car’s depreciation in value during the time that you’re using it.

You can also choose whether or not you want to own the car once you’ve fully paid off the finance. If you do, you’ll pay a final balloon payment to make up the remaining value of the car. If not, you can hand the car back to the dealer with nothing more to pay. Be aware that you won’t own the car unless you opt to do so at the agreement’s termination.

Hire Purchase (HP)

Hire purchase car finance is similar to PCP, but a little more straightforward. You’ll typically make a deposit of around 10% with HP finance, then make fixed monthly payments according to a pre-determined schedule. Repayment terms can be relatively flexible, and there are often competitive interest rates with HP finance.

Like with PCP, you won’t own the vehicle until you’ve made the final repayment of your agreement, but you can opt to do so with a final balloon payment. After this, you can choose to part exchange, sell or keep the car. However, unlike PCP, you won’t usually face mileage caps, so HP finance may be preferable for you if you’re regularly making long journeys.

Personal Contract Hire (PCH)

PCH car finance is when you lease the car, which is why it’s also known as a car leasing agreement. You will never be its outright owner – you’re essentially hiring it until the end of your finance agreement. In this way, PCH differs from either HP or PCP. Though it’s technically not car finance, as you’re not borrowing money, you’ll still see this term frequently used when discussing car financing options.

With PCH, you’ll typically pay a non-returnable deposit as well as your monthly repayments. At the agreement’s end, you’ll hand the car back. If you’ve gone over the mileage cap or have made unreasonable vehicular wear and tear, you’ll pay a penalty fee.

Find the right car finance for you with My Car Credit

Shopping around for car finance can seem stressful, but it needn’t be. My Car Credit aims to make the process of securing your dream deal stress-free and streamlined. Contact our expert team today on enquiries@mycarcredit.co.uk to start your car finance journey.