Guide to car finance
Transport is everyday essential for many households and families; however many find that buying a car outright can be too expensive. Car finance allows you to purchase a vehicle over a period of time, spreading the payments into more manageable monthly instalments.
There’s a variety of different car finance options out there and understanding which options you have available is important when considering taking on any form of funding. In this guide we’ll look at the different types of car finance and how they work.
Hire Purchase (HP)
Hire purchase is a car finance option that allows you to spread the cost of paying for a car over a period, usually between 12-60 months. After paying an initial deposit (some HP agreements don’t need a deposit, see our no deposit car finance options) Most hire purchase car finance agreements come with an option to purchase, meaning once you have paid your agreed final instalment the car will be yours.
You will not be faced with mileage caps or penalties for wear and tear damage to the car, as you will be the legal owner of the vehicle at the end of your HP arrangement. It’s important to remember that you won’t own the car until you have made all repayments though: this means that you can’t sell the vehicle without the permission of your finance provider.
You can choose to end your HP agreement early and return the vehicle, but some HP agreements come with an early repayment charge so check your agreement carefully and ensure the car you’ve chosen will be one you’re happy with for the full term. It’s worth noting that you may become liable for wear and tear damage if you end the HP agreement early.
Personal Contract Purchase (PCP)
Personal Contract Purchase (PCP) finance agreements can be slightly more complex, but like hire purchase agreements, allow you to spread out the cost of purchasing a car.
With PCP agreements you put down an initial deposit and pay monthly instalments which allows you to use the vehicle. However won’t own the car at the end of the agreement unless you pay a final instalment (or ‘balloon payment’) which would be the value of the cars resale price-the Guaranteed Minimum Future Value, set out at the start of your PCP arrangement.
Once your contract has ended, you have several options:
- Buy the car outright for the price of its Guaranteed Minimum Future Value, set out at the start of your PCP arrangement, minus your deposit. This is known as a balloon payment, but if you’re struggling to afford a large final payment to purchase the car- you can seek to finance your balloon payment
- Hand the car back and walk away without further payments (subject to any mileage or wear and tear charges outlined in your arrangement)
- Trade it in for a new PCP agreement
You should be aware that if you exceed any mileage caps or if the car is returned in a condition that is deemed ‘unfair wear and tear’, you could be charged additional fees. This will be outlined in your PCP arrangement. If you want to end a PCP agreement early, usually you must have paid at least half the value of the vehicle. If not, you might to pay the difference before you end the agreement and return the car.
A personal loan from a bank or building society could allow you to purchase a car outright. You then owe the lender the cost of your vehicle and repaying over a set amount of time, often between 1-7 years. A personal loan isn’t a secured loan, meaning it wouldn’t be held against an asset like your home or vehicle. This presents more risk for the bank or building society, so your credit history would be carefully considered in the lenders decision and if you’ve struggled with bad credit in the past it could impact your approval.
If you’re considering a personal loan, it’s worth getting comprehensive insurance for your vehicle to ensure you’re able to repay the loan in the case of damage to your vehicle.
Personal Contract Hire (PCH)
With a Personal Contract Hire (PCP) you pay a fixed monthly rate in exchange for the use of a vehicle, essentially ‘borrowing’ it. Servicing and maintenance for the vehicle usually comes included in the contract. There’s usually a mileage cap limiting how much you can use it and the car never actually belongs to you, but it can be quite flexible on payment terms — from 12 to 36 months. You should usually expect to pay around 3 months ‘rent’ for the deposit.
All the cars we source finance for at Red Potato are sold under a hire purchase (HP) agreement. When applying for a hire purchase agreement through us, we understand that you may have an adverse credit history, or have previously been refused car finance.
- You are in an IVA/Debt plan
- You have no deposit
- You have a CCJ
- You have previously been declared bankrupt
- Are self-employed
Borrowing £5,500 over 48 months with a representative APR of 19.9%, the amount payable would be £162.34 a month, option to purchase fee £10.00, with a total cost of credit of £2,302.32 and a total amount payable of £7,802.32