Car Finance Explained

Personal Contract Purchase (PCP) is a type of car finance that is secured against the car and allows the borrower to make monthly payments towards the cost of the car. At the end of the contract, the borrower has the option to either return the car, trade it in for a new one, or pay the remaining balance (also known as the Guaranteed Minimum Future Value (GMFV)) to keep the car. One of the main advantages of PCP is that it allows the borrower to drive a new car without having to pay the full price upfront. The monthly payments are generally lower than other types of car finance, as the borrower is only paying for the depreciation of the car rather than the entire purchase price.

One thing to be aware of with PCP is that the borrower is required to pay a deposit upfront, which can be a significant amount depending on the value of the car. Additionally, the borrower is responsible for any maintenance and repair costs during the contract period. Dealer contribution can also be included in a PCP agreement, which means that the dealer will contribute a certain amount towards the deposit or monthly payments. PCP is currently the most popular method of buying a car in the UK.

Hire Purchase (HP) is another option for financing a car. Hire purchase is similar to PCP in that the loan is secured against the car, meaning you do not own the car until the loan has been paid in full, including any final settlement fees.

With a hire purchase loan, you take out a loan to purchase the car over a fixed term and make monthly payments to pay off the loan. At the end of the contract, you own the car. With a hire purchase, you’re able to pay off the loan early, which will save you money in the long run. However, the monthly payments for hire purchase are generally higher than other types of car finance, as you’re paying off the entire purchase price of the car, including interest.

In the UK, it is illegal to sell a car that is on finance as you are not the legal owner until the finance has been paid off completely. This is why it is important to check for outstanding finance on a car before purchasing it to make sure that there are no liens or debts attached to the vehicle.

If you purchase a car with outstanding finance and the seller does not settle the loan, you may be at risk of having the car repossessed by the lender.

Leasing a car is similar to renting a car, as you only pay for the use of the car rather than the purchase price. With a lease, you make monthly payments to the leasing company and return the car at the end of the contract. One advantage of leasing is that the monthly payments are generally lower than other types of car finance, as you only pay for the car’s depreciation. A disadvantage of leasing is that is no option for you to own the car at the end of the contract, and the car must be handed back. There may also be additional fees charged if the car is not returned in good condition.

With a bank loan, the borrower takes out a loan from a bank or other financial institution to purchase the car and makes monthly payments to pay off the loan. One of the advantages of a bank loan is that you have the option to shop around for the best interest rates and terms. However, you’ll need to have a good credit score to qualify for a bank loan at a decent rate, and the monthly repayments may be higher than with other types of car finance. With bank loans, the loan is also not secured against the car, which makes selling the car on the private market a lot simpler.