Car Finance Guide

Nowadays, more people are applying for car finance schemes to get their hands on a set of wheels they love. More than just a way of spreading large, upfront costs – today’s selection of financing options offer drivers flexibility. Owners of both new and used vehicles are able to gradually invest in a car they intend to keep and own, hire a car for a few years without investing and taking ownership; or make that decision years down the line.

Of course, there are many different schemes out there and it can be hard to know which is right for you. It’s not only important you find something that fits your budget, but that it’s suited to how and why you drive – and what your plans are for the future.

Here, we’ll help you get to grips with car finance.

Types of Car Finance

There are many different ways of financing a car, and each is suited to a different kind of customer.

Personal Contract Purchase (PCP)

PCP is a great form of car finance for both business and private drivers, and can be used on any new, nearly-new or used car, up to three years old.

How it works: You agree a contract length and mileage allowance with your provider, before putting down a deposit. Based upon these factors, an estimate of what the car’s value will be come the end of the contract is made – this is referred to as its ‘projected value’.

This amount is then offset, and the remaining balance along with a little interest are split into fixed monthly payments. When the contract comes to an end, you have several options. Either you pay the projected value and take ownership of the car, use any equity as the deposit on your next car, or hand it back and walk away.

Who it’s suited to: PCP agreements are well suited to both personal and business customers. It’s great for those who prefer flexibility, who want plenty of time to decide whether this is a car they want to keep and who would rather wait and see what their financial situation is further down the line before committing. Monthly payments are comparatively cheaper and cover the car’s depreciation plus interest, rather than pay off its actual value. It’s particularly well suited for those looking to own a new car.

Hire Purchase (HP)

Hire Purchase is the most traditional form of car financing. It’s available to private customers only, and can be used on any new and most used vehicles – any vehicles less than ten years old.

How it works: Simply put, it’s the car’s version of a mortgage. You put down a deposit and agree to a term length. Across the term, you simply split the remaining value into set monthly instalments. When you make the final payment, the car becomes yours and you keep it.

Who it’s suited to: The great thing about Hire Purchase is that the value is secured against the vehicle itself, so you’re free to return it. If you drive a lot, the mileage limits that come with other forms of financing can be restrictive and result in larger monthly payments – but there aren’t any mileage limits with hire purchase.

Balloon Hire Purchase

This form of car finance is available to both business and personal lease customers. It’s very similar to Hire Purchase, but with one key difference.

How it works: As with Hire Purchase, you place an agreed deposit and settle on a term length. Throughout the term you pay fixed monthly instalments on a chunk of the car’s value. Come the end of the contract a final ‘balloon’ payment – of an amount you’ll have set this amount at the beginning of your contract – will be owed, after which you’ll take ownership of the vehicle. This does mean your monthly payments will be cheaper, but you have to plan for playing the balloon payment; you can’t simply hand the car back.

Who it’s suited to: Balloon Hire Purchase can be an attractive option as it significantly reduces the size of the monthly payments. It’s well suited to those who are sure they would like to own the car, but want to defer a bulk share of the cost. If you’re a private customer looking to an upcoming house sale, remortgage or personal loan to cover the cost of a new car further down the line for example, this might be the option for you.

Business Contract Hire (BCH)

This is a straightforward and convenient plan for business drivers. They’re likely to be offered on any new car when you visit a dealership.

How it works: Business Contract Hire is seriously simple – in essence you ‘rent’ the car. You agree a rental term and mileage allowance, and then place a deposit; the more you put down now the smaller your monthly payments. You keep paying these until the contract is up, then you return the car at the end.

Who it’s suited to: These car finance deals are ideal for businesses as it means they’re not left with an expensive asset that they don’t need come the end of the contract, they can simply return it. That means there’s no need to worry about depreciation or changing resource needs in the long-term. It gives employees access to all the latest models, and maintenance costs can even be covered under the monthly fee.

Personal Contract Hire (PCH)

Whether you prefer always having the keys to the latest releases, or you aren’t ready to invest in a car that you own, personal contract hire is a convenient option for private drivers.

How it works: Much the same as Business Contract Hire, you agree a rental term, set a mileage allowance and place a deposit. You then pay monthly instalments through which you ‘rent’ the car – then hand it back to the dealer at the end of the contract.

Who it’s suited to: This is a superb option for those who don’t want to financially commit to a single vehicle and love to drive the latest models. Aside from the deposit there’s no big sums involved, yet this package still means you’ll be driving around in new cars at a price you can afford. Because you don’t own the car you needn’t worry about depreciation or how you’ll sell it on in the future. You can simply use it for the period of your contract, hand it back, then move onto something new. But do be aware you’ll have to stick to your agreed mileage allowance, and there’s no option to buy at the end.

Advance Payment Plan (APP)

Available to business customers looking for finance cars, an Advance Payment Plan offers flexibility.

How it works: When you take out an Advance Payment Plan, there are no monthly repayments. You still agree a contract length and mileage allowance, but an estimate of its future value is also taken. This is known as the Guaranteed Minimum Future Value; or GMFV. This amount is set aside until the end of the agreement, while the remaining balance is paid up front. When the contract ends, you can either pay off the GMFV and keep the car, or hand it back.

Who it’s suited to: The key element of this option is its flexibility. It allows a business to partly invest in a car without having to commit to giving it back or keeping it quite yet, that decision can be made a couple of years down the line. They can even offer employees the chance to buy the car from them by paying the remaining GMFV, otherwise they’re free to give it back – and aren’t left with an expensive asset they now need to sell. It’s important to remember that you’ll still need to set a mileage allowance and that APP can only be used on new cars.

Personal Loan

Of course, you don’t have to take the options offered by your dealership – you can take matters into your own hands.

How it works: You could choose to borrow the amount you need to pay for the car, and then repay the amount to your bank or lender. On the plus side, you won’t have to pay a deposit and you’ll own the car from the outset, but the APR may be high and you’re taking matters into your own hands. You also bear the brunt of the car’s depreciation

Who it suited to: This is only an option for private drivers who are certain they’d like to buy outright. Bear in mind that good loan terms will only be available to those with a clean credit rating, and there may be penalties for settling early. Also, if you default on your loan, you could be stripped of the car as it’s your own asset. That means that this can be a risky option.

Car Finance Deals

With any car finance option from a dealership, there are a number offers and deals that could be presented to you. These include

0% Finance. This is an offer that tends to be used in order to shift outgoing or slow-selling models. There’s no surprises, you really won’t have to pay any interest on your monthly repayments, but you’ll most probably have to pay a significant deposit. It’s also important you keep up to date on your payments or you could lose your 0%.

Scrappage Schemes. These are increasingly popular across the UK motoring industry. When the time comes to buy a new car on finance, you trade in your old vehicle to a dealership. They’ll then offer you a part-exchange arrangement with a given trade-in allowance, and you could drive away with a new car from them at a reduced price. You may also benefit from additional offers under the scheme, such as 0% finance. Only cars of a certain age are eligible for these schemes, so always check.

Additional extras. You may be offered additional insurance products when you take out a car financing arrangement. These include ‘gap insurance’, which covers the gap between the current market value of the car and the value of your outstanding loan should it be stolen or written off – as well as ‘minor damage insurance’. This covers small cosmetic damage which might affected the guaranteed value of the car when you come to the end of your contract.

Car Finance Tips

When entering a car finance arrangement, it’s important you get a fair deal that works for you.

Remember the interest. Whether or not a particular finance deal is affordable for you may well come down to the APR (annual percentage rate). This can vary significantly from model-to-model and dealership-to-dealership, while some may even offer you 0%. When calculating what the deal will cost you, always take the APR into account.

Think about what you want at the end. If you’re certain you want to keep a car come the end of a contract, don’t pay more for the privilege of choosing further down the line. Similarly, if you have doubts about whether you’ll want to keep the car in 3 years’ time, don’t enter a Hire Purchase agreement where you’ll have to take ownership and face selling it on yourself.

Be realistic. It’s easy to be enticed by low monthly payments, but consider the cost throughout the whole period of the finance scheme. Stretching your contract for longer will mean more interest is accumulated. Similarly, don’t agree on a large final balloon payment unless your certain you’ll be able to afford it come the end of the contract.

Shop around. Don’t just go with the first deal you get. Prices and offers will vary significantly from dealer to dealer, so make sure you shop around. Don’t be tempted to jump at a dealer who’s discounted the car’s overall value, as the rates you’re offered may not actually be preferable and you could end up paying more on a finance plan.

Take your time. Don’t be pressured into signing on the dotted line. Speak to your dealer time and time again about what your intentions are, what you need from the car and how you’ll use it. They should be able to advise you on which finance option is best suited for you, but don’t be afraid to question their choices. They’ll appreciate this arrangement has to work for the both of you.