Car finance deals are a common way to buy a new car, with low interest rates making them much more affordable. Motorists can choose from lease purchase, contract hire, PCP (Personal Contract Purchase) and HP (Hire Purchase). With various deals available, figures from finder.com documented that a total of 2.4 million cars were purchased on finance in 2018, a rise of 2% on 2017 and of that just over 64% were for used cars.
In spite of this, car finance can seem complicated, with so many options and calculations. So we have put together a comprehensive guide to car finance and how it works.
There are two main types: Hire Purchase and Personal Contract Purchase.
PCP: Personal Contract Purchase
In 2015, almost 60% of new cars bought on finance were bought with PCP deals.
PCP works by estimating a Guaranteed Minimum Future Value (GMFV) for the car. You take out finance on the difference between the initial price and the GMFV.
Example - If the car costs £20,000 and the GMFV is £8,000, you can defer payment of this until the end of the agreement. You are normally required to put down a deposit which can be increased to reduce your monthly payment further.
At the end of your agreement, you have three options:
- Give back the car and walk away
- Buy the car outright for the GMFV, known as the ‘balloon payment’, as well as any Option to Purchase Fee
- If the car is worth more than the GMFV, you can use any enquity as your deposit in a part-exchange on another car
If the car is worth less than the GMFV, you can still give the car back and walk away – any potential shortfall sits with the finance company.
PCP finance often means lower monthly repayments, but you have to agree (and stick to) a mileage limit. You will be charged per mile if you exceed your allowance. This is to guarantee the GMFV, as cars with high mileage are worth less money.
- Typically lower monthly payments than HP
- Usually a short-term agreement of 3 or 4 years
- You can change cars regularly (subject to required deposit)
- There is no need to worry about how to sell the car at the end
Things to consider
- You don’t own the car unless you pay the final balloon payment, plus any Option to Purchase Fee
- You have to keep the car in good condition or excess wear and tear charges may apply
- You must stick to a mileage limit or risk incurring extra charges
- There may be an early resettlement fee to end the contract early
HP: Hire Purchase
Hire purchase is the traditional car finance deal, similar to the process of having a mortgage on your house. You put down a deposit and borrow money to pay the rest of the value, including interest. But once all final payments including any Option to Purchase Fee are made you become the outright owner.
Example - If the car costs £20,000, you make a deposit of £2,000 and take out finance on the remaining £18,000.
Hire Purchase has fixed interest rates, so you know what you’re paying every month right from the start and the price won’t go up. But your final payment may include an ‘Option to Purchase Fee’ so make sure you know what this is
- Fixed interest rates
- You own the car at the end and can keep it, sell it or part-exchange it
- No mileage restrictions on the majority of car brands
- Flexible deposit and payment terms
Things to consider
- Traditionally higher monthly payments than PCP
- You must settle the finance agreement in full and pay any ‘Option to Purchase Fee’ before selling the car
Hire Purchase is popular because it makes budgeting easy. The deposit and payment terms are determined before you sign the finance agreement, so you will know and be able to impact your monthly payment upfront.
PCP & HP Differences
The table below lists out the main differing factors between the two finance plans outlined above:
|Ability to own the vehicle at the end of the term
|Monthly fixed payments
|Uses estimated future value of vehicle to reduce monthly repayments
|Possibility to receive any sale proceeds
|Flexibility to settle early
|Road Fund Licence included for period
|Maximum mileage restrictions
|Lump sum payable by customer at end of agreement if you wish to own the vehicle at end of agreement (in addition to option to purchase fee if applicable)
|Monthly rentals subject to VAT
All car finance is offered with interest to be paid, meaning you will pay more than if you bought the car outright.
Finance can be arranged for new and used cars.
Make sure to check the Annual Percentage Rate (APR) offered, which includes both interest and other charges that apply. This shows you the full cost of the finance and makes comparing options easy.
Terms and conditions
Jardine Motors is the broker, not the finance provider, though may receive commission upon arranging finance plans with third parties. The car belongs to the finance provider until you have made all the payments. If you don’t keep up with the repayments, they may be entitled to repossess the car.
Car finance is available subject to status and affordability, and the interest rate varies depending on your personal circumstances.
Lancaster Motor Company Limited, Lancaster Cars Limited, Lancaster Luxury Vehicles Limited, Lancaster Sports Cars Limited and Lancaster Specialist Cars Limited are all authorised and regulated by the Financial Conduct Authority for credit-related regulated activities and insurance mediation activities.