Car finance helps you spread the cost of a car purchase rather than paying the amount upfront. There are 3 main routes to purchase the car: Hire purchase, Personal Contract Purchase and Personal loans. They all differ in ownership, monthly cost, flexibility, and end-of-term options. The blog discusses Hire Purchase, Personal Contract Purchase and Personal loan aspects in detail.
A Quick Overview: The big 3 ways to finance car purchase
Here is the nutshell of the best options to finance car purchase in the UK:
- HP (Hire Purchase): You pay a deposit and the rest in fixed monthly instalments until the loan term. You own the car at the end of the loan if you clear the dues on time.
- PCP (Personal Contract Purchase): It is a flexible financial arrangement where you pay an initial deposit and the remaining in fixed repayments. However, to close the loan here, you need to pay a balloon payment if you want to own the vehicle. Alternatively, you can return or change the vehicle after the term.
- Personal loans: In personal loans, you split the cost of the purchase into fixed monthly instalments, and you own the car from the beginning of the agreement.
What is car finance?
Car finance is a way to split the cost of purchasing a car into fixed instalments over the loan term. One must provide a deposit in the initial stage to qualify for the car finance agreement in most cases.
One can finance a car in 3 popular ways – Hire purchase, Personal Contract Purchase and Personal loans. You can get car finance from a bank, dealer, lender, or credit union. One can choose the right one to borrow from by analysing the flexibility they seek, the amount needed and quotes they may qualify for.
How does car finance agreement work?
Here is how car finance works in the UK:
- Step 1- Set your budget
Work out how much you can afford for monthly payments, car deposit, insurance, maintenance, and possible balloon payments.
- Step 2- Analyse your credit score
Lenders analyse your credit history, income, debt-to-income ratio, employment history, and residential proof to decide whether to provide a loan and, if yes, what interest rates you should get. Therefore, update the credit report by updating personal information, paying some debts, and reporting delinquencies.
- Step 3- Choose a Finance type
Decide the best options from Hire Purchase, Personal Contract Purchase, and personal loans by understanding your affordability, car purchase goals/preferences, and flexibility you seek. Check the eligibility of each while exploring the best option for car finance in the UK marketplace.
- Step 4- Choose the car and confirm the deal
Determine the car you want to purchase, deposit requirements, car purchase price, contract length, interest rates, monthly payment, and annual mileage limit.
- Step 5- Apply for a loan and pass the credit check
The lender or a dealer analyses your loan application. They check whether you meet the eligibility and the affordability criteria to get car finance. Finance is not guaranteed and is subject to credit and affordability assessments.
- Step 6- Provide car finance deposit
Hire Purchase and Personal Contract Purchase deals begin with a deposit. However, the deposit requirements may vary. Ask your creditor before providing one.
- Step 7 – Make monthly payments
You can repay a fixed and agreed amount per month on a car finance arrangement until the loan term.
- Step 8- Follow the agreement rules
With HP and PCP, keep up payments and maintain the car. PCP agreements also usually set a mileage limit and condition requirements.
- Step 9- Complete the agreement
Lastly, you may own the car at the end of the agreement with Hire Purchase. Alternatively, with PCP, you get the option to return the car, purchase the car, or exchange the car according to the existing equity. For personal loans, you own the car legally at the end of the loan term if you clear the repayments.
What are the key differences between HP, PCP, and personal loan car purchases?
Here are some key differences that you may consider before financing a car purchase:
- Ownership
Personal loans grant you immediate ownership of the vehicle in the initial loan phase only. However, you get ownership at the end of a Hire Purchase agreement. If you are on a PCP agreement, you must pay a balloon payment to own the car legally.
- Monthly repayments
If you are stuck between HP vs. PCP, PCP could be better as it has the lowest monthly payments. HP has costlier monthly payments than PCP and personal loans. It is because a personal loan is not structured around a deferred value.
- End of the term choice
A personal loan lacks any end-of-term decision or choice. Hire purchase deals usually end with the ownership of the vehicle. You generally share more choices with a PCP car finance agreement. It lets you return the vehicle, part-exchange it, or buy it by paying a balloon payment.
- Flexibility
A personal loan is the most flexible because there are no mileage limits or balloon payments. However, you may provide a deposit if you are considering car finance with a bad credit score. It reduces the liabilities and helps you qualify for better interest rates and affordable terms.
- Total cost
PCP may appear cheapest due to low monthly payments. However, it may cost you more if you pay the balloon payment to purchase the car. Always compare the best option by checking APR, interest rates, total repayable amount, deposit requirements, balloon payment needs, etc.
Bottom line
Therefore, PCP may be ideal if you don’t want to stick to a car or want to drive advance models. Alternatively, if you want fixed repayments and terms HP and personal loans may be ideal choice. However, in HP, you must provide a deposit to continue.
You own the vehicle at the end of the agreement in HP while you own the car from the beginning on a personal loan. For PCP, you get the option to exchange, return or buy the vehicle at the end of the term.
