The Ultimate Guide to Car Finance

Finding a car is one thing; paying for it is another. With so many options available, choosing the right way to finance your new car can be tricky.

To help we’re taking a look at the most prevalent car finance options, covering how they work, their benefits, and what you need to know.

Quick Links

• Car Finance Types Explained
• Hire Purchase (HP)
• Personal Contract Purchase (PCP)
• Personal Contract Hire (PCH)
• Alternate Ways to Finance Your Car
• Things to Consider When Buying a Car on Finance

Car Finance Types Explained

From HP to PCP to PCH, there are all sorts of initialisms relating to car finance, but what do they all mean? To help you navigate the often-confusing world of financing a car, we’ve explained the three most common car finance options available.

Hire Purchase (HP)

What is Hire Purchase?

Hire Purchase (HP) is available when buying a new or used car. With this option, you’re taking out a loan that’s secured against the car, and will need to make monthly payments until it’s paid off.

How does Hire Purchase car finance work?

Hire Purchase is the simplest finance option available. Here’s how it works:

• First, you’ll need to put down a deposit for the car you want to buy. This is usually a minimum of 10% of the vehicle’s value, but you can put more down to reduce the monthly costs.
• The dealership will then arrange the finance, checking your credit history to find the most suitable deal.
• The interest rate you’ll pay depends on your credit history, as well as the car you’re buying. New cars tend to attract more competitive rates, while interest is higher on used models. An annual interest rate of 4-8% is typical for most Hire Purchase finance options.
• When you receive the car, it’s important to remember that you don’t own it until the end of the agreement. You may also need to pay an ‘option to buy’ fee, which is usually £100-£200.

What are the benefits of Hire Purchase car finance?

• Low deposit
• No large ‘balloon payment’ as with PCP
• Fixed interest rate
• Flexible repayment period (1-5 years)

What are the disadvantages of Hire Purchase car finance?

• You don’t own the car until the end of the agreement; it could be repossessed if you fail to keep up with payments
• Higher monthly payments than PCP
• Large deposit for high-end cars

Personal Contract Purchase (PCP)

What is Personal Contract Purchase?

Personal Contract Purchase (PCP) is the most popular way to finance a new or used car. As with Hire Purchase, you pay a low deposit and monthly instalments, and can then decide whether to return the car, pay it off, or put the resale value towards a new one.

How does Personal Contract Purchase work?

A Personal Contract Purchase is a little more complicated than Hire Purchase. Here’s how it works:

• First, you’ll need to pass a creditworthiness check, which the dealer will arrange. This is to make sure you can afford the repayments for the length of the agreement.
• Next, you’ll have a deposit to pay, which is normally around 10% of the car’s value. However, you may be able to pay more or less than this depending on the lender and how much you can afford in monthly repayments.
• When you’ve got the keys, it’s important to remember that you don’t own the car, nor will you automatically own it at the end of the agreement. As part of your contract, you’ll also be governed by a total annual mileage limit; go over this, and you’ll need to pay the excess (normally charged at around 10p per mile).
• At the end of the agreement, you have three options:
• Pay the balloon payment and keep the car (bear in mind that this could be in the thousands, depending on how much the car is worth)
• Return the car to the dealer, ending the agreement
• Trade in the car for a new model

What are the benefits of Personal Contract Purchase?

• Lower monthly repayments than Hire Purchase
• Flexible repayment plans (3-5 years)
• Option to end the deal with no further payments to make

What are the disadvantages of Personal Contract Purchase?

• High final balloon payment if you want to keep the car
• Restrictive mileage limits
• You will be tied to the same dealer if you want to trade in the car at the end of the agreement
• Creditworthiness check may be tough to pass for those with bad credit

Personal Contract Hire (PCH)

What is Personal Contract Hire?

Personal Contract Hire (PCH) is a new way to finance a car whereby you never own it. Also known as leasing, you pay a fixed fee for an agreed period, while staying within a mileage limit (designed to retain the car’s resale value).

How does Personal Contract Hire work?

Personal Contract Hire has risen to become one of the most popular options for financing a car. Let’s take a look at how it works:

• You choose a car and undergo a routine credit check, to make sure you can cover the repayments.
• Normally there is no deposit to pay, unlike with HP and PCP financing.
• The dealer will agree a leasing period based on how long you want to keep the car. You’ll also need to give an idea of how many miles you cover each year, as this will affect the monthly hire cost.
• When you get the keys, you’ll be governed by certain provisions, including staying under the mileage limit and abiding by the car’s service schedule. Failure to follow these regulations could result in charges when you return the car.
• At the end of the agreement, you return the car with nothing more to pay. Think of PCH as a long-term car hire.

What are the benefits of Personal Contract Hire finance?

• Nothing to pay at the end of the agreement
• No or low initial deposit
• Great choice of new cars at competitive prices
• Flexible leasing periods (1-5 years)
• May be able to leave the agreement early
• Dealers will sometimes throw in extras, like free servicing

What are the disadvantages of Personal Contract Hire finance?

• You’ll never own the car
• High monthly payments depending on the make and model
• Restricted by mileage limits
• No option to modify or customise your car without permission
• You must return the car in ‘good repair and condition’, making regular servicing and careful driving essential to avoid additional charges

Alternate Ways to Finance Your Car

While HP, PCP and PCH are the most popular ways to finance a new or used car, there are other options that may prove safer and more affordable.

Credit Card

If you have a credit card with a high available balance, putting a car on it may work out much cheaper and safer than a finance contract. Here are some of the benefits of paying for a car with a credit card:

• Flexible repayments – pay back what you want, when you want
• Pre-approved – meaning no more credit checks and flags on your credit history
• Low interest rate – if your card has a decent interest rate, this could instantly make your purchase more affordable

Personal Loan

Financing a new car with a personal loan could work out cheaper than the equivalent HP, PCP or PCH finance deal. Here are the benefits to consider:

• More control over the lender you borrow from
• Greater pool of lenders to compare rates between
• You can take advantage of special offers from lenders, often with low interest rates

Things to Consider When Buying a Car on Finance

While buying a car through finance is common these days, you shouldn’t go into it lightly. There are lots of things to consider before making a decision, so you’ll need to look carefully at your finances to make sure you can afford the repayments.

As a reminder, here are a few things to bear in mind when buying a car through a finance plan:

• You don’t own the car – it’s easy to think a car is yours when you get the keys, but with all finance plans, it isn’t. That means you’re governed by T&Cs which are designed to retain the car’s resale value, so always read the small print in the contract carefully before signing.
• There will be extra costs – dealers are good at luring you in with seemingly competitive finance options, but there are always extras to pay. Again, read the contract carefully so you have an idea of everything you’ll need to pay over the course of the agreement.
• It could make or break your credit rating – financing a car is the single biggest purchase most of us make aside from getting a mortgage, so you have to take it seriously and understand that it holds huge sway over your credit rating. If you’re responsible, it could pay off and help build your score, but if not it could have a serious impact on your finances in the future.

So, there you have it, our ultimate guide to financing your next car. While we can’t make buying a car easier, we can help you maintain it when you’ve got the keys. For more information about Prestone and our high-quality maintenance fluids, visit the homepage.