Car Finance Explained
There are three main types of finance that most dealers offer:
Hire purchase (HP)
- This is secured finance against the vehicle itself and you do not own the car until you have made the final payment , whilst within the agreement you can’t sell it without settling off the finance balance,. You would typically pay a deposit (often 10%) and then repay the balance in instalments, plus interest, over the loan period. At the end of the loan period, you own the car outright. If you settle the finance early you should be entitled to a rebate on the interest
Personal contract purchase (PCP)
- This typically involves paying a deposit then low monthly instalments over a fixed period. At the end of this, you can either pay a lump sum (‘balloon payment’) to purchase the car outright, return the vehicle or sell it privately to pay off the remainder, alternatively you could consider refinance the car again. This suits people who want to change their car frequently, and is based around a ‘minimum guaranteed future value’ (MGFV) for the car.
Personal leasing (contract hire)
- This is like a PCP, again with low monthly payments, but without an option to buy the car at the end of the contract. However, it is convenient and it’s easy to change the car. The type of car, length of contract and agreed mileage limits determine the overall leasing cost. You normally have to pay up to three months’ rental in advance.