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Car finance explained: the overview

What is car finance? This is the term used to describe the options available to acquire the use of a car. There are several types available. However, before you enter into an agreement it is worth taking a moment to consider your requirements, both at the start and the end of the term to ensure the finance type is right for you. How do you choose?

Personal Loan

This is available for new or older cars and means you own the car outright. Unlike other options you are free to make modifications, use the car how you wish or sell the car. With no mileage restrictions and no loan to value this means you can borrow more than the value of the car, for instance if you wish to cover the cost of insurance.

Personal Contract Purchase

This is available for new or nearly new cars only. The repayments are lower as a large proportion of the loan, known as the Guaranteed Minimum Future Value, is deferred to the end. Mileage restrictions apply, and you don’t own the vehicle until all payments including the deferred balance have been made. At the end of the term you can choose to pay the deferred balance and buy the car, or return the car with nothing further to pay.

Lease Purchase

Lease Purchase is available for new and older cars. This is very similar to PCP, however, at the end of the agreement there is no option to return the car to the lender. No mileage restrictions apply. At the end of the term you make the final balloon payment and own the car.

Hire Purchase

This is available for new and older cars. The monthly repayments are higher than PCP as you are repaying the full amount of the loan over the term. There are no mileage restrictions and at the end of the term you own the car.

Personal Contract Hire (Personal Leasing, PCH)

This is effectively a long term rental agreement. You lease the car for an agreed period making fixed monthly payments. Servicing and maintenance may be included or charged separately. At the end of the term you simply hand the car back.

Things to consider before choosing your car finance

  • Do you need lower monthly repayments with a balloon payment at the end? If you opt for a balloon and decide to keep the car you will need to find funds to cover this final payment.
  • How will you use the car? If you intend to use it for business purposes, rallying or if you wish to modify the car, then owning the car outright will avoid lenders’ restrictions.
  • Do you wish to keep the car longer term? If so, a balloon payment may be difficult to afford or finance at the end of the term.
  • How old is the car you wish to buy? PCP is only available for newer cars, typically less than 5 years old.
  • Are you able to accurately predict your annual mileage limit? Personal Contract Hire and Personal Contract Purchase require you to set an annual mileage limit.