Finding the best car finance for you comes down to a range of factors.
Distinguishing between different car finance agreements can feel mystifying, which is why we’ve provided this handy guide to help you secure the best car finance for your needs and circumstances.
What are the different car finance options available?
Not everyone has the available cash to pay for a car upfront, which is where car finance comes in.
Car finance is essentially a flexible, accessible way of financing a car. It allows you to borrow a pre-agreed amount of money to purchase a vehicle. This money is paid back in a series of affordable monthly instalments, during which time you have full use of the vehicle.
If you have car finance eligibility, you can apply for one of two agreements – either hire purchase (HP) or personal contract purchase (PCP). These are the two main types of car finance.
There are also leasing agreements and car loans, but strictly speaking, these aren’t car finance, so we won’t be discussing them here.
Hire Purchase (HP)
With HP car finance, you’ll pay an initial deposit followed by a series of equal monthly repayments. The size of these will depend on your unique car finance deal, as well as the size of your deposit.
At the end of an HP finance deal, you will own the car outright – no final payment is required. As such, your repayments on HP are likely to be slightly higher than with PCP finance.
HP car finance is available for both new and used vehicles.
Personal contract purchase (PCP)
PCP finance is much like HP car finance. You pay a series of monthly instalments to the lender, the size of which is determined by your initial deposit and contract length.
However, unlike HP finance, you don’t automatically own the vehicle when a PCP deal terminates. This means that your repayments with PCP will be lower than an equivalent HP deal, because you’re technically only paying for the car’s depreciation value.
If you choose to own the vehicle at the end of the car finance deal, you’ll pay one final lump sum (a balloon payment). This can be equivalent to a third or half of the car’s initial price, so you can refinance the vehicle to pay for this.
Alternatively, if you have positive equity – meaning the car is worth more at your car finance contract’s end than the optional final payment – you can hand the car back, choose another, and put the extra value towards this vehicle’s deposit.
What is the best car finance for me?
The best car finance for you will depend on a number of factors…
For low monthly payments
Monthly payments are higher with HP because you automatically own the car outright at the end of the finance agreement.
If keeping your monthly repayments low is a priority, PCP is the best car finance for you. However, you may end up paying more overall than with HP finance, depending on the interest rate and length of your finance agreement.
For minimal restrictions
PCP finance often comes with restrictions. These can include everything from mileage restrictions through to paying extra fees if you return the car with excessive wear and tear. Equally, if you want to take your car abroad, you may face limitations with certain PCP agreements.
HP finance does not have these kinds of restrictions or limits, so it’s a better option if you think you’ll rack up a high mileage over your finance agreement – or if you often want to drive internationally. You’ll also own the car outright once you’ve reached the end of your finance agreement.
PCP finance agreements might have vehicle usage restrictions. However, PCP deals tend to be more flexible than HP finance.
Both kinds of finance have flexible repayment terms (typically somewhere from 12 to 60 months). However, with PCP, you have more opportunity to determine the length of your agreement. You can also change the size of your deposit.
Remember, the higher the deposit, and longer the contract, the lower these monthly repayments will be. That said, you may end up with higher interest rates compared to HP finance.
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