What are the different car financing options?

A financed car on a hill

Are you currently looking to purchase a car but are worried about paying in full? If so, there are a few alternative payment options to this and in this article, we will explain the three main types available. We will then show the pros and cons of each to help you choose the option that best suits you.

Car financing allows you, the customer, to acquire a car through a loan or lease, which you pay in installments over a fixed period.

1. Personal Contract Purchase (PCP)

Personal Contract Purchase is one of the most common types of car finance available. It is like a standard personal loan, but it has some different terms and conditions such as:

  1. You are not the legal owner of the vehicle throughout the duration of the agreement
  2. The amount you pay back each month is determined by the number of miles you plan to drive each year. This is calculated at the beginning of the agreement.       

Through PCP, you will open an agreement that will allow you to use the car until the contract ends; you will only pay to cover the car’s depreciation till this time. Simply put, you can say that it is a kind of long-term rental (which typically lasts three to five years).

When you reach the end of the contract, you will have three main options: – You can:

  1. Buy the car with a final payment, often referred to as a balloon payment
  2. Return the vehicle and you will not have to make any further payments (other than any wear and tear, if required)
  3. Trade it in and use its value to form a new personal contract purchase agreement on a new car.

Advantages of Personal Contract Purchase

  1. The initial down payment/ deposit is low.
  2. Monthly payments are fixed and, in many cases, includes maintenance and servicing costs.
  3. You are not bound to make the final payment to purchase the car; it is optional.
  4. If you do not buy the car at the end of the contract, there is no concern for the vehicle’s depreciation.

Disadvantages of Personal Contract Purchase:

  1. If there is severe damage to the car, you will have to pay extra charges.
  2. Annual mileage is fixed and there will be an extra charge for it if you do not buy the car at the end of the contract.
  3. If you decide to return the car in the middle of the contract, you will be charged a penalty fee.

2. Personal Contract Hire (PCH)

Personal Contract Hire is quite similar to Personal Contract Purchase with one main difference; the vehicle is on HIRE. In the PCP agreement, you have the option to purchase the car at the end of the agreement with a balloon payment; on the other hand, you do not get this option at the end of a PCH agreement.

You have your car for a fixed period (often between 1 to 5 years), where you pay a monthly fee for this duration, and once the contract is over, you can hand the car back and walk away without any extra payment. You still need to pay taxes on Hire Purchased cars, however, if you are VAT registered you can claim it back.

Advantages of Personal Contract Hire

  1. No need to worry about the depreciation of the car as you will eventually return it.
  2. You can get a more superior and more luxurious vehicle for less money.
  3. For a small uplift to the monthly payments, you can get a maintenance package that will cover your vehicle’s full servicing costs.

Disadvantages of Personal Contract Hire

  1. Even if you love the car, you cannot purchase it at the end of your contract.
  2. If you decide to cancel the contract early, you will have to pay extra charges.
  3. You need to maintain and keep the car in good condition where you must keep it up to fair wear and tear guidance. You can check this at the beginning of the agreement.

3. Hire Purchase (HP)

Hire purchase is different from PCP and PCH and that once you have made the final payment on your contract, you will own the car. The key differences between the three are:

At the end of each lease:

  1. PCP, you have the option to buy the car
  2. PCH, you do not get to purchase the car
  3. HP, you own the car

With a Hire Purchase agreement, you will first pay an initial deposit and then you will spend the rest of the amount of your car in monthly installments (which is also known as an installment plan)

Advantages of Hire Purchase

  1. There will be no need to estimate your mileage or pay excess mileage charges.
  2. You can own the car at the end of the lease, where you may not have otherwise managed to pay in one go.
  3. It is an easy and straightforward way of financing

Disadvantages of Hire Purchase

  1. Contracts made with Hire Purchase are mostly fixed, so you may lose the car if you ever face a financial crisis.
  2. Ownership is not transferred until you make the last payment.
  3. A significant amount goes towards paying interest, so you can end up paying more than your car’s actual price.
  4. You cannot sell the car until you get the ownership.

Hopefully, you now know what the different types of car finance options available are with their respective pros and cons. I hope this article will help you decide which option is best for your circumstance!

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