Think car finance is one straightforward method to acquiring a car? In this day and age, you might want to think again.
Car finance has evolved over the years, and it’s not just as simple as paying monthly till you own it (although, that is one option if you so choose). There are now several possibilities when it comes to financing your next vehicle.
For car buyers in the UK, you’ll find three core paths to choose from when making that all-important decision – and we’ve broken them down right here:
1. Hire Purchase (HP)
Hire Purchase (or HP finance) is the most traditional type of finance – one that has been offered by car finance lenders for years.
You kick-start the process by providing a deposit, before agreeing to a set amount of monthly payments with a fixed interest rate. With this type of car finance, you have no mileage restrictions or excess wear and tear worries.
Though this might not offer the cheapest monthly option, you will own the car outright once that final payment has been made.
Those potentially suffering from a bad credit score will need to look to HP finance if they wish to get approved for car finance, as it’s much harder to get credit on the next finance type we’ll explore.
In this position, it’s always a good idea to try a soft search eligibility check beforehand to see if you have a chance of being approved without it further harming your credit score.
2. Personal Contract Purchase (PCP)
If you like to stay flexible, then Personal Contract Purchase (PCP finance) is likely to be for you.
PCP finance is not setup to guarantee ownership – although that is an option – and most of the car’s value is actually tied up in an optional final payment that, once paid, would make the car yours.
Because of this optional payment at the end of the contract, the monthly payments will likely be cheaper compared to that of an HP deal, and you are effectively paying to cover the car’s depreciation until you get to that final payment.
A deposit and a set number of monthly payments are where the similarities end between HP and PCP. In addition to the optional final payment, you’ll also have to determine a mileage limit for the contract and keep track of any damage over and above general wear and tear.
Exceed your mileage or cause too much damage, and you’ll be likely to end up paying excessive amounts to cover the costs if you choose to hand the car back.
The end of the contract is also a big change from HP, as you’ll get three core options:
- Make the final payment and take ownership
- Exchange the car for a new one using any equity in the vehicle
- Walk away completely
3. Personal Contract Hire (PCH)
Personal Contract Hire (or PCH) is a form of car leasing. It may be a more suitable option if you want to swap your car more often.
Depreciation can often put you off buying a brand-new vehicle, but getting a car on Personal Contract Hire can crack bypass issue. A car dealer can provide you with a new car every few years, and you’ll have no hassle of ownership.
When you set up a car finance deal with a Personal Contract Hire, you need to decide on your mileage restrictions and the overall agreement length. You will essentially pay for what you use and can offer an upfront payment (known as an Initial Rental) to make your monthly payments cheaper.
After this, you start your monthly payments – you can even take advantage of some additional benefits such as maintenance packages that ensure your payments cover annual servicing.
Applying for Finance
You can often start your car-buying journey with a free eligibility check. Many car companies have them, and you can use them to check your eligibility without any ill effect on your credit score.
You can then progress and go through a full finance application, which involves a hard credit check. At some stage, every car finance lender will conduct a hard credit check .; however, if you have checked your eligibility beforehand with positive results, you can progress through this stage with confidence and work your way towards a new car.