Types of Car Finance

This brief guide provides an overview of the main ways of financing your vehicle to help you understand your options.

PCP

Personal Contract Purchase (PCP) agreements are an increasingly popular contemporary method of funding a vehicle, and they are usually used for newer models. They require you to put down a deposit on a car to secure it, which will go toward its cost, and then you will borrow the remaining amount from a finance provider. You will not pay back the full cost of the vehicle, instead, you will pay monthly instalments that will all contribute to the interest and the value that the vehicle loses while in your possession. This is known as its depreciation.

Once the contract ends, you will have three options. You could simply return the car to the finance provider with nothing left to pay. You could alternatively make a balloon payment to keep the car. This optional final payment will cover the difference between the total you have paid toward your vehicle through your monthly instalments and its initial price at the start of your agreement. The third option is to part exchange the car and begin a new PCP contract.

PCP is a great option if you think you are going to want to change your car regularly but you still want the option of purchasing. It is a flexible finance type in this sense. Another advantage is that in comparison to other types of finance where your payments go toward ownership of the vehicle, PCP monthly payments are typically lower. Something to bear in mind however is that personal contract purchase agreements usually involve mileage caps.

HP

Hire Purchase (HP) also involves putting down a deposit to secure a car, followed by regular repayments to a finance provider which will all contribute to the  overall value of the vehicle. As your monthly payments will have covered the entire cost of the car by the end of the agreement, you will then take ownership of it. 

There are several advantages of HP finance. It is widely considered as one of the most straightforward forms of finance agreement as it calculates the sum of the vehicle price minus your deposit and simply divides the remaining amount across the number of months in your contract period. 

A major benefit is that you actually get to keep the car, and whether you continue to use it or sell it, you will have an asset at the end of your agreement. The vehicle won’t legally be yours until your final payment is made, but as it will almost definitely become yours, you will not be as limited by mileage caps and charges for excessive wear and tear as you would with other finance types.

Personal Loan

With a personal loan, you may be able to buy a vehicle outright, and you will then repay the amount that you borrowed over a set period of time. Personal loans are unsecured, which means that you won’t have to provide an asset as security.

Unsecured loans have pros and cons. With PCP and HP, your finance provider could repossess the vehicle if you are unable to keep up with your payments, but an advantage of a personal loan is that it won’t be secured against the car, so you wouldn’t need to worry about it being repossessed. This means that there is less risk for you, but on the other hand, there will be a greater risk to the lender, and to compensate for this, personal loans often require a good credit score for approval. You may have a better chance of being accepted and getting a competitive rate if you apply for a loan that is secured.

Leasing

Leasing is different from the finance types mentioned previously because there is no option to purchase and keep the vehicle at any stage of the agreement. Leasing simply allows you to use the car by making regular payments. The amount that you are charged will depend on the value of the vehicle, the length of the contract and the mileage allowance agreed between you and the leasing company.

The good news is that your monthly payments will be relatively low, given that you are only borrowing the vehicle. Although, be mindful of other costs, for example, charges for returning the car with damages, excessive wear and tear or for exceeding the mileage limit.

Credit Card

Some dealerships will accept credit card payments, which will enable you to pay all or part of a vehicle’s price after driving the vehicle away. 

As long as you can pay off your credit card payments, this method can provide additional protection. You will be covered by Section 75 of the Consumer Credit Act, which holds your card provider jointly responsible for contract breaches or misrepresentation by a trader.

However, be aware that credit card interest rates can be higher than other finance types, and there will be pressure to pay it off as soon as possible to avoid interest. 

Cash or Debit Card

Of course, you could just pay for your vehicle in full with cash upfront, which will avoid interest payments altogether and allow you to own the car outright straight away.

You won’t need to worry about keeping up with monthly loan repayments when you use cash or debit card, and you will easily be able to sell the vehicle whenever you want. The downside is that a cash budget might not allow you to afford as much as your monthly budget would, which could result in you settling for a less impressive model or specification. It may also leave you out of pocket which could lead to financial strain if you encounter unexpected costs with the car or in your life generally. 

To find out more about the available options when it comes to purchasing your next car, speak to the experts at Autozone/Car Credit Now by giving us a call, or apply for used car finance in South Yorkshire via our website!