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Finance options explained

THE DIFFERENT TYPES OF FINANCE OPTIONS    

Car finance can be overwhelming. With so many acronyms and different terminology, what does it all mean and how do you choose the most suitable package for you?

To help you, we've broken down all the options to give you a clearer idea of what is involved when choosing how to finance your vehicle.

Hire Purchase (HP)

If you choose to pay for your car with a Hire Purchase agreement, you will normally pay an initial deposit, choose the length of your agreement (usually 1–5 years) leaving you with a monthly payment amount. Once we’ve approved the finance application, it’s yours to drive away. And once all the installments have been paid, you own your car.

Pros

  • You’re more likely to be accepted for hire purchase than a personal loan from your bank if your credit rating isn’t great.
  • It’s a fixed rate loan (it will remain unaffected by changes in interest rates).
  • You can choose the length of your agreement (12 - 60 months)
  • You will own the car at the end of your agreement


Cons

  • Monthly payments can be higher than on a lease or a PCP agreement
  • You may need a larger deposit to allow you to have more affordable monthly payments
  • You won't own the car until the final payment is made

Representative example of a Hire Purchase agreement

Model Suzuki Baleno SZ-T
Cash Price £12,999.00
Deposit/Part Exchange £1,240.00
Total Amount of Credit £11,759.00
Purchase Fee (inc in payments below) £10.00
Total amount payable £15,466.66
Initial payment £290.34
47 monthly payments £290.34
Final payment £290.34
Duration of agreement 49 months
Representative APR 9.9% APR
Interest rate (fixed) 9.45%

Personal Contract purchase (PCP)

Personal Contract Purchase (PCP) is extremely popular. Similar to a HP agreement as you will usually pay an initial deposit, followed by monthly installments but what makes PCP different is that your monthly installments are only paying off the depreciation of the vehicle, rather than the entire value.

In simple terms this means that the money you're actually borrowing and repaying is the difference between what the car is worth now, and what it will be worth at the end of your contract (the depreciation). You'll pay this difference in monthly installments. This type of finance is appealing as it results in lower monthly payments at the end of the initial agreement you will be left with a final balance (the Guaranteed Future Value) which you'll need to pay or re-finance if you want to own the car outright. Your monthly payments will also vary depending on the annual mileage you do, which you will set before taking the agreement. It's important that you don't exceed the agreed mileage on the contract if you plan on giving the car back, or you could be liable for additional charges at the end of the agreement on a per mile basis.

Once your monthly payments are finished, you’ll have three options:

  • Buy the car by paying the optional final payment (the Guaranteed Future Value or balloon payment)
  • Hand the car back. Your finance company has already predicted the Guaranteed Future Value of the car, so handing the car back will settle the deal, but you must ensure you have stuck to your agreed mileage allowance, or you could be liable for additional charges.
  • Part-exchange for a new car

Pros

  • Cost effective - lower monthly payments
  • Sizable deposit contributions are often offered on PCP contracts
  • Allows you to change cars more often


Cons

  • You will have to make a decision at the end of the contract as to whether you wish to sell the vehicle, return it or keep it
  • A charge will be made for excess mileage if the contract mileage is exceeded
  • You must have fully comprehensive vehicle insurance


Representative example of a PCP agreement

Model Swift 1.0 Boosterjet SZ-T
Cash Price £12,999.00
Deposit / Part-Exchange £1,240.00
Deposit Contribution £500.00
Total amount of credit £11,259.00
Purchase Fee £10.00
48 monthly payments £159.00
Optional final payment £4,558.00
Duration of agreement 49 months
Representative APR 2.9% APR
Interest rate (fixed) 2.83%
Total amount payable £13,430.00
Mileage Allowance 9000

Personal Contract Hire (PCH)

Personal Contract Hire (PCH) is a long-term rental for those that are not looking to buy the car at the end of their contract. You lease the car for an agreed period of time by making fixed monthly payments. When the contract expires, you simply return your car or take out a new contract on a new vehicle.

Pros

  • Fixed-cost motoring
  • No depreciation risk or disposal risk
  • You only pay for the use of the vehicle
  • Flexible initial payment


Cons

  • Maintenance payments can push costs up
  • Recharges to be made for damage (not fair wear & tear)
  • Early termination can be expensive
  • You won’t own the car after the agreement ends

Representative example of a PCH agreement

Model Swift 1.0 Boosterjet SZ-T
Advanced Rental £1,069.78
49 Monthly rentals £178.30
Mileage Allowance 9000

Personal Loan

A Personal Loan is usually the cheapest way to finance a car deal.

You can get a personal loan from your bank, building society or finance provider as long as your credit rating is good.

Do make sure the loan is not secured against your home. Otherwise you’ll be putting your home at risk if you fail to keep up with repayments.

Shop around for the best interest rate by comparing the APR (or annual percentage rate, which includes charges you have to pay as well as the interest).

Pros

  • Can be arranged over the phone, internet or face-to-face
  • Can be for the whole cost of the car, or for a part of it
  • You own the car while paying off the loan so if you got into financial difficulties you could sell it. Check with the lender this would be the case before taking out the loan
  • Good fixed interest rate if you shop around and have a good credit rating

Cons

  • You might need to wait for the money to come through, although some lenders make funds available almost immediately
  • Personal loans aren’t always the cheapest way of borrowing. Sometimes car dealers offer 0% or very low interest deals to shift their stock, often on a ‘flat rate interest’ basis. But make sure you also ask what the annual percentage rate (APR) is as well, as it includes all other charges as well as the interest. When comparing loans, always focus on the APR and the total amount payable
  • Taking out a personal loan might affect your credit rating. Be careful about this if, for example, you’re also planning to take out a mortgage
  • You're more likely to be accepted for car finance than for a personal loan

 

Decided on your finance option and want to apply?

Once you’ve chosen your new car and found a finance option that suits your needs, you can either pop into one of our branches or apply here to save you a journey. 

Once approved, it’s just the case of understanding your finance agreement, signing the documents and then you’re ready to drive away! Simple!

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