You and Your Money
PERSONAL FINANCE: What You Need To Known about Car Financing
There are three main types of motor finance deals available. So that you can find the right deal for your needs here is a brief explanation of the options available.
Personal Contract Purchase – PCP
PCP is one of the most popular options for car finance. This offers a flexible choice with low monthly repayments and a low initial deposit. When you set up a PCP contract you will need to pay a percentage of the total costs upfront (the deposit) and then you will pay off the remaining amount in monthly installments. These monthly installments will be much lower than other finance deals because of the GFV agreement in the contract. GFV stands for Guaranteed Future Value and is basically one large, final balloon payment due at the end of the finance deal. This GFV will be set by the lender at the beginning of the contract. If you do not want to pay the final GFV you can return the car to the dealer (as long as you have not exceeded the mileage limits).
PCP deals give you the option to afford a new car through low monthly repayments and you can make these even more affordable by paying a larger initial deposit at the beginning of the deal.
Hire Purchase – HP
Most people will be familiar with HP as this is the traditional way to finance a new car. HP is very straightforward and is a simple loan finance deal. There are no mileage rules or GFV to worry about so once you have finished the monthly repayments you will own the car. You will need to pay an initial deposit at the beginning of the HP agreement and you can secure lower monthly repayments if you pay a larger initial deposit. HP is a form of secured loan and in this case the asset is the car. This means if you do not keep up with the monthly repayments you could lose your car. This is why it is important to check your finances before you take out a HP agreement to make sure you can afford the monthly repayments.
HP deals are easy to understand and can help you to afford the car you want.
Lease purchase can provide you with a way to afford more expensive cars but still keep your monthly repayments low. Lease purchase has a similar structure to PCP plans and the main bulk of the repayments are deferred to the end of the contract. In this case though the capital lump sum is referred to as the Residual Value (RV). You will have to settle the RV in order to gain ownership of the vehicle at the end of the contract. As with PCP plans mileage limits will be placed within the contract and you can return the car without paying the final RV if you want to, as long as you have not exceeded these limits. However it is not guaranteed that the dealer will accept the car back as in a PCP plan so you could end up having to pay the final RV whether you want to keep the car or not. However the lack of guarantee does mean that the finance rates are lower than with PCP contracts.
Lease purchase can offer you with much lower APRs than PCP and HP deals and can be a good way of purchasing a more expensive car with lower monthly repayments.
Car finance deals can provide you with a way to afford the car you want by offering you low monthly repayment options.