As cars become more expensive, we usually find ourselves needing to obtain finance to assist in the purchase of a vehicle. This can either take the form of dealership offered finance such as Hire Purchase or a vehicle loan obtained from a bank.
There is no right or wrong way to finance your vehicle but each option is slightly different, with its own advantages and disadvantages. Here we’ll give you an overview, helping you to make an informed decision.
As the name suggests, any finance offered by a dealership or car garage will be given to you to assist in the purchase of a vehicle. The finance itself will be tied to the vehicle, making it difficult to sell in the future without having paid off any outstanding balance first. There is usually an interest rate applicable which is how the dealership makes money on the amount you borrow. Interest rates will vary but are typically always high.
Hire Purchase (HP) is the name of a finance package which spreads the cost of a vehicle purchase across an even number of smaller payments. This is one of the most popular forms of vehicle finance as it allows customers to see exactly how much the car will end up costing them for the entire loan term. Common loan terms are 36 – 60 months, but of course, the longer the term – the lower each monthly payment. In contrast, you end up paying more in the long run due to the compounded effects of interest.
Personal Contract Hire
Personal Contract Hire (PCP) is a much newer form of borrowing. It is different to HP as your monthly payments do not include the entire value of the vehicle. Instead, your loan is calculated based upon what the car is predicted to be worth in 3 or 4 years’ time. It is at this time that you’re expected to hand the car back or find the lump sum balloon payment which will be the remainder of the value of the vehicle.
It might sound complicated but it’s simple in practice. The idea is increased flexibility, leaving you effectively renting the car for a few years instead of buying it outright. You build up equity in the car and then decide whether you want to return it, losing the equity, or keeping it and finding the final balloon payment.
Advantages and Disadvantages
Both options can make sense depending on your needs. The differences can be summed up as:
- PCP will result in lower monthly payments as it is assumed you’ll return the car.
- HP can work out slightly cheaper if you intend to own the car outright.
- PCP gives you the flexibility of changing car with minimal hassle every 3 to 4 years.
- PCP will usually require a greater upfront deposit.
Our advice would be to sit down with a calculator and take the time to perform some financial planning. The purchase of any car constitutes a considerable outlay so take the time to make sure you’re informed and decide on the best course of action for your needs and your budget.