Confused about car finance? There are many finance products on the market these days however most fall under two categories, hire purchase and personal contract purchase.
Understanding Car Finance
If you have made the decision to buy a new car and are looking at ways to spread the payments over a number of years then you have a few options. Depending on the price of the car and your savings, you could put down a large deposit and take an unsecured loan from the bank to cover the rest, take a secured loan from the bank or remortgage to free up funds or you could look towards car finance plans.
Car finance basically comes in two main guises, hire purchase (HP) and personal contract purchase (PCP). The latter has become ever more popular in the last 5 years and is now available from most car manufacturers under various product names. The following describes the two options and their benefits.
Hire Purchase is the simplest of finance models. You simply agree to pay the entire value of the car over a fixed contract term, usually 3 to 5 years. The lender will charge interest which is added to your monthly payments. Once you complete making your monthly payments, the car is yours.
The advantage of HP is its simplicity and, when you consider the total amount paid, it is usually the better option. Monthly payments are high though, so if you have a tight monthly budget, you may be restricted in what you can buy.
Personal Contract Purchase
Personal Contract Purchase is a far more complicated animal! Basically, you agree to take the car for a fixed contract period (e.g. 3 years) and make monthly payments during that time. The lender estimates the value of the vehicle at the end of that contract (future value) and then calculates your monthly payments based upon the depreciation or difference between the price of the new car and the estimated value at the end of your contract.
Your monthly payments are much lower than those of an HP agreement therefore as you are not paying for the entire cost of the car, simply financing the depreciation. The estimated depreciation will depend upon the contract term and annual mileage you expect to cover.
At the end of the contract or sometime before the end (depending upon the plan), you have the option to take the car back and start a new PCP agreement on another vehicle providing that the current value of the car is greater than that originally estimated or you cover the difference. Where the current value is greater than the estimated value, the difference can be used as a deposit on the next car. You other option is to wait until the end of the contract and then pay the final balloon payment (the value the car was estimated to be worth at the end of the contract). In this case the car is yours to keep.
The benefits of PCP are the low monthly payments and flexibility to either change or keep the car at the end. This is making PCP ever more popular and you will see most manufacturers promoting PCP plans within their websites.
Getting a Great Finance Deal
Askaprice.com has details of all major manufacturer finance deals currently available in the UK. We can also help you achieve a great discount on the new car price which will further reduce your finance payments. Simply complete our quote form and let us do the rest for you!