If you’re looking to get a car on finance, you may think it’s a one size fits all agreement. However, in the UK, there are 3 main deals that tend to be the most popular.
Each agreement has a different structure, and it can be hard to know which is best for you! Whether you’re looking to get a car on PCP, hire purchase or by using a personal loan, you should always do your research first. The guide below looks at each agreement in a little more detail and helps you decide which car finance agreement is right for you.
1. Hire purchase
Hire purchase is a straightforward form of finance which allows you to spread the total cost of your chosen car into affordable monthly payments till the end of an agreed term. HP deals can be spread over 3-5 years which means you can choose a term that suits your budget. HP is a secured loan which means that the lender owns the car throughout the agreement. Ownership will only transfer to the driver when all payments have been paid on time and when the small option to purchase fee has been paid too. HP can be good for those who are struggling to get approved due to bad credit as the lender can use the car as collateral if you fail to repay.
2. PCP (Personal Contract Purchase)
PCP car finance deals are one of the more complex ways to finance a car but tends to be very popular amongst drivers. PCP is a form of Hire Purchase but instead of spreading the cost of the value of your chosen car, most of the value is differed until the final balloon payment. This means that PCP cars can benefit from lower monthly payments than other options and offers the driver more freedom. At the end of the agreement, you have three options to choose from.
- Hand the car back to the dealer. As long as the car is in good condition and within the agreed mileage, you can simply hand the car back to the dealer and there are no more payments to make.
- Settle the final balloon payment. If you wish to keep the car, you will either have to pay the large balloon payment or you could find a lender who refinances PCP balloon payments to help spread the cost.
- Trade in the car for a new one. If you want to get another car on PCP, you can use any positive equity of your current car to reduce the cost of your next car on PCP.
3. Personal loan
A personal loan is a one of the most cost-effective ways to get a car on finance. A personal loan isn’t secured against the vehicle, and they can be used to buy anything you want. You can choose the loan amount you need and buy a car just like a cash buyer. Personal loans can be best suited to those with good credit scores, and it can be harder if you have had credit problems in the past. At the end of a personal loan, there is nothing else to do. As long as all payments have been made on time and in full, the agreement has ended and there is no more action to take.
Which car finance agreement is right for you?
If you’re wondering which car finance agreement to choose, there are a few factors to consider first to help make your decision a little easier.
Credit score
Your credit score plays an important part in car finance. From a lenders point of view, they want to know the likelihood of you paying your finance back on time and in full. A credit score indicates how you’ve handled credit in the past and an applicant who has missed payments or made late repayments increase the risk to lend to. People with better credit scores usually get access to the best rates too so if you’re credit is a little on the low side, it can be a good idea to take some time to improve your credit it before you start applying. Hire purchase can be better suited to bad credit as the lender can take the car off you if you fail to repay. However, this can also impact your ability to get finance in the future and you may be refused car finance.
Ownership of the vehicle
If you want to own the car you are driving, you may be best suited to a personal loan. A personal loan allows you to buy the car at the start of the agreement, modify it as you like and sell it when you want. Both hire purchase and PCP deals can allow you to buy the car from the dealer at the end of the agreement or at any time by settling the balance, but this can be ana expensive way to get to take ownership of the vehicle.
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