Many manufacturers have their own finance packages, but providing you wish to do anything other than buy it outright in a cash purchase, the majority are variations of the following schemes. With the help of the information below, you'll soon know which is the right type of finance for you.
Personal Contract Purchase is a highly attractive and very popular way to own a new, nearly new or used car. It combines fixed monthly payments with exceptional flexibility at the end of the agreement.
Your car's Guaranteed Future Value is calculated (based on a pre-agreed mileage per year and the age of the car) and is deferred as a final payment. At the end of your PCP agreement you have total control in deciding which of these choices suits you best:
- Retain - Buy the car by paying an agreed minimum residual value (Final Payment)
- Return - Return the car with nothing more to pay, subject to mileage and condition. (i.e. If car prices fall substantially and you find you have negative equity you hand the car back with nothing to pay!)
- Renew - Part-exchange your car, and if there is any remaining equity after the final payment is taken care of, this is yours to use as deposit or take as cash-back.
Why choose Personal Contract Purchase?
Fixed change cycle - know when your car is due for upgrading, with the flexibility to do this early if your circumstances change
Guarantee - A minimum Future Value for your car is guaranteed by the lender
Great Monthly payments - perfect for budgeting
You’re in control - Buy the car, just return it or part-exchange it, the choice is all yours!
Tax breaks - If you're opting out of a company scheme, your cash alternative isn't subject to company car tax
VAT free - no VAT on payments
Many thousands of UK consumers have already benefitted from PCPs and the vast majority are using PCP as their preferred method when it comes to changing for their next car!
Hire Purchase is perhaps the most traditional of funding methods. The monthly payments are determined by the amount of deposit initially paid, the period of the contract and the overall price of the vehicle. Once all the payments due under the agreement have been made the title passes to you and you are free to keep or dispose of the vehicle as you see fit. Should your circumstances change you are able to settle the agreement early, and your finance company will be happy to provide a figure for this at any time.
A typical hire purchase option will consist of paying a low deposit amount (maybe 10% of the vehicle price), have no mileage restrictions and entitle you the customer to eventual ownership of the vehicle.
Essentially, the Hire Purchase funding option is best suited to those customers who want simplicity. With the funding secured against the vehicle, finance acceptance may be easier to obtain than an equivalent unsecured personal loan and as such can help in protecting the customers first line of credit, the amount of money that the customers bank will lend without asking for further security.
This payment plan, normally more suited to Business Users (but becoming more common for personal users via 'PCH') effectively allows you to 'hire' vehicles as opposed to owning them. This way, drivers need not be concerned about issues such as residual values or selling the vehicle when the finance term is up. A contract hire agreement can run over one, two, three or four years.
If you are a VAT registered business a proportion of the rentals may be tax deductible. Contract hire is classified as an operating lease for current taxation purposes, therefore it is regarded differently to 'purchase' contracts so you may benefit from certain tax advantages. Your financial or tax advisor should be able to advise you if this applies.
A finance lease is a tax efficient and flexible way of purchasing a car. As with Contract Hire this way of funding is more suited to a business customer. The flexibility comes from the ability to choose between two options. The first being that they can spread the total cost of the vehicle, which includes interest charges over a certain period leaving no further money to be paid. The second option is simply to offset an amount to the end of the term with the result being that the customer would benefit from lower monthly repayments. The final deferred rental would be based on the anticipated, projected resale value of the vehicle.
The responsibility for selling the vehicle at the end of its contract term lies with the customer. This means that there could be a profit depending upon the amount of finance still outstanding.
In terms of businesses, while the ownership of the vehicle remains with the leasing company for the period of the contract, the vehicle does actually appear on the company's balance sheet. As with Contract Hire a proportion of the rentals paid can be offset against taxable profits.