Which type of car finance is best?

Getting a car on finance is a great way to spread the cost of owning your next car into affordable monthly repayments.

car finance

You can usually get a better car then you first thought and pay for it in payments that are right for you! There are a number of car finance UK agreements available but how can you choose which one is best for you? The informative guide below explores two of the most popular car finance agreements and their pros and cons. Let’s take a look.

How does PCP car finance work?

PCP car finance is a type of car finance which gives the consumer a large amount of flexibility and more options and the end of the finance agreement. With a Personal Contract Purchase agreement, you will make fixed monthly payments to an agreed term (usually 1-5 years) with added interest on top. Monthly payments tend to be lower than other options because you don’t spread the cost of the whole car. You only pay for part of the cars value and then have 3 options at the end of your agreement. You can either:

  • Hand the car back to the dealer and there are no more payments to make
  • Pay the final ‘balloon payment’ and keep the car
  • Use the value of the car as a deposit for a new car with a new PCP deal

Benefits of a PCP agreement

There are a number of reasons why many people choose to finance their next car using Personal Contract Purchase:

  • More flexibility at the end
  • Low, fixed monthly payments
  • Fixed interest rate
  • Available on both new and used vehicles
  • You don’t have to own the car

Disadvantages of PCP deals:

Naturally, PCP deals wont suit everyone and there are few things you should be aware of before you sing on the dotted line.

  • Mileage charges. You will be required to set a mileage limit at the start of the agreement and there will be charges if you exceed the limit.
  • Damage charges. You will also be required to keep the car in good condition throughout the agreement and may need to pay additional damage charges.
  • Large balloon payment. If you want to keep the car at the end of the agreement, you will be required to pay the balloon payment which can be quite large.

How does Hire Purchase work?

Hire purchase car finance is a simple form of finance which spreads the cost of your chosen vehicle into monthly payments with added interest. You are essentially hiring the car from the lender until the end of end of the agreed term which can be between 1-7 years. Most people who take out hire purchase have the intention of owning the car at the end, but the car won’t be your until you’ve made the final monthly repayment. You will usually put down a deposit and make monthly repayments with added interest.

Advantages of HP (hire purchase)

Hire purchase is one of the most popular and straightforward forms of finance.

  • There are no mileage or damage restrictions
  • Low or no deposit options available
  • Flexible repayment terms
  • Fixed interest rates
  • Own the car at the end
  • New and used cars can be financed

Disadvantages of hire purchase deals

There are a number of things you should consider before you take out a hire purchase car finance agreement.

  • Higher monthly payments. Because you spread the cost of your chosen vehicle monthly payment scan be higher than other options.
  • Secured loan. This type of loan is secured against the vehicle which means if you fail to make your repayments, you could lose the car.
  • Won’t own the car till the end. You won’t have legal ownership of the car until you make the final payment.