Are you in the market for a new car and not sure how to fund it? You’re probably not alone. When it comes to getting a car on finance, there are many options to choose from and it can be confusing. Hire purchase and Personal Contract Purchase are two of the most popular ways to finance a car. The guide below has been designed to explore each in more detail, the pros and cons and how to decide which car finance agreement is right for you. Let’s take a look.
What is hire purchase?
Hire purchase is a straightforward type of finance which allows you to spread the cost of your chosen car and can be used on both new and used vehicles. The loan amount is fixed against the vehicle that you choose and can be spread over 1-5 years. You can choose whether you put down a deposit or not and then make monthly payments till the end of your chosen term. Hire purchase deals will have the interest rate included in your monthly payments and interest can be subject to status and credit situation. Once you have made all your repayments, you can pay the small option to purchase fee and keep the car.
Benefits of hire purchase
- Fixed interest rates and payments. It’s easy to factor hire purchase payments into your monthly budget as the interest rate and monthly cost will be fixed throughout so you know exactly how much you’ll be repaying till the end of the term.
- Reduce monthly payments with deposit. Within HP agreements, you can choose if you want to put down a deposit but putting more in at the start can reduce your monthly payments.
- Bad credit considered. Hire purchase is a form of secured loan which means the lender owns the car throughout the agreement. It can be possible for people with low credit to get accepted as the lender can use the car as collateral if you fail to repay.
- Own the car at the end. Once all the repayments have been made, you have the option to purchase the car by paying an amount which is usually similar to your monthly payments.
What to consider before getting hire purchase
- Higher monthly payments. HP can have higher monthly payments than PCP because you spread the full cost of your chosen car with interest. If you want to pay your deal over the longest period possible too, you will end up paying more interest overall.
- Don’t own the car till the end. If you’re looking for a car finance deal where you own the car from the start, you may be better suited to a personal loan. You won’t own the car till the final option to purchase fee has been made.
How does Personal Contract Purchase work?
PCP is a form of hire purchase, but it can offer the consumer more flexibility. PCP works in the same way as HP where you make fixed monthly payments till the end of the term, but you don’t cover the cost of the vehicle. Instead, you pay for the cost of the deprecation. You also have three options at the end of your agreement. You can either choose to hand the car back to the dealer and the agreement has finished, use the value of the car towards a new deal on a new car or pay the balloon payment and keep the car. PCP deals are usually paid back over 1-3 years and can benefit from low monthly payments.
Advantages of PCP
- Lower payments. Your monthly payments go towards depreciation rather than the full cost of your chosen vehicle. This can help make monthly payments much lower than other options.
- More flexibility. Within PCP, you don’t have to own the car if you don’t want or if you want to keep the car, you can pay the balloon payment.
- Driver a better car. PCP can be used on both new and used cars and you can usually get a better, higher specification car with low monthly payments than you would with other agreements.
- Change your car more regularly. You can choose to hand the car back at the end of the deal and it for another car. This can be a great option for people who like to change their car often.
Are there any drawbacks of PCP car finance?
- Large balloon payment. If you do want to keep the car, you will have to pay the large balloon payments. This is usually thousands of pounds, and it can be hard to pay for car finance and be saving up to pay the final payment. You could consider refinancing a balloon payment if you did want to keep the car and spread the cost.
- Mileage restrictions. Lenders will need to set a Guaranteed Future Value of the vehicle you choose so they will usually ask you to set an annual mileage limit. If you exceed the limit at the end of the deal, you can face additional charges.
- Damage charges. As most people tend to hand the car back to the dealer, you will also need to agree to keep the car in good condition throughout the agreement. If the conditional of the car goes beyond general wear and tear when the agreement ends, you can be liable to pay damage charges.
- Interest rate is credit dependant. Your credit score can affect the interest rate offered and having a low credit score could see you face higher interest rates.
