Hire Purchase, Personal Contract Purchase & Personal Loans

What is the best way to finance a car? It is a common question. In short, it all depends on the individual seeking financial assistance and their specific circumstances.

For someone with a strong credit history who has held their job for a considerable time and lived at the same address for an extended period, all options are often available. They are more likely to have their applications for various forms of credit approved at a competitive interest rate (APR) than someone with contrasting characteristics, such as a new or relatively new position, a short duration at their home address, and a poor, light, or non-existent credit history.

At Credit Expert, we specialise in helping people with a light or no credit history. Typically, we work hand in hand with them to demystify the process and tailor a finance approval that matches their circumstances whenever possible.

We know people like to research their options, so this car financing guide covering three of the most common options helps.

A final and essential part of this introduction. No matter which car financing route you follow, you must ensure it is affordable and that you can sustain the monthly repayments to avoid additional fees or potential repossession.

When evaluating what you can afford each month, remember that a car has ongoing costs such as insurance, road tax, and maintenance or repairs. Be sure to factor these expenses into your budget.

Hire Purchase (HP)

HP allows people to spread the cost of the vehicle they choose to buy from a recognised car dealer over 24-60 months. The monthly repayment, which is fixed, except for the final payment, includes ‘capital’ (the cost of the car) and interest, which is set at the start of the agreement.

The final monthly payment is the same as all previous payments, except that it will include an option to purchase a fee, which enables ownership to be transferred to the customer.

While a deposit may not be necessary, it will strengthen a finance application and help reduce the monthly repayment amounts.

There are no mileage excesses on an HP agreement.

When all payments have been made, including the option to purchase fee, either by letting the agreement run its entire course or by settling the agreement based on a figure provided by the lender, then the customer becomes the owner.

You cannot sell the car that is financed until all payments have been made.

Personal Contract Purchase (PCP

Personal Contract Purchase (PCP) agreements tend to focus on new cars and cars up to three or, at a push, five years old. Their appeal lies in helping to reduce monthly repayments, but this usually means customers will pay more in interest charges. Ownership only happens when the ‘Guaranteed Future Value’ or GFV is paid.

With a PCP, which is usually only available through a recognised car dealer, customers spread the cost of their vehicle by paying fixed monthly repayments over 36 to 48 months to suit their budget, much like an HP agreement.

Unlike an HP agreement, PCPs include a  final Guaranteed Future Value (GFV), sometimes called a ‘balloon payment.’  This GFV, set at the start of the agreement based on the car’s make and model and agreed annual mileage, forms a final large and optional payment that reduces the rest of the preceding monthly payments compared to an HP agreement.

Interest rates are fixed at the start of the agreement to create fixed monthly repayments, except for the GFV. A customer choosing the PCP option will pay more interest overall than a comparable HP agreement because more debt (courtesy of the GFV) is outstanding for longer.

Customers have three options at the end of your agreement: retain, return or replace the vehicle.

• Retain: they can keep the vehicle and become its owner by paying the GFV and the option to purchase fee at the end.
• Return: they can hand the vehicle back and walk away from the car without paying the GFV, but will be liable for any excess mileage and non-wear and tear damage costs.
• Replace: they can part-exchange the vehicle at a local dealership to get a new vehicle. If the car is worth more than the GFV, they can use any ‘equity’ in the car as part of a deposit against their next purchase.

Personal Loans

Unlike HP, with a personal loan, customers own the car from day 1, and they can buy a car from anyone because the loan is not linked directly to the car.

Like HP, there is no future GFV/balloon payment and no risk of any excess mileage. Again, like HP, the loan interest rate is set at the start of the agreement, and monthly payments are fixed for the length of the agreement, which can be up to 60 months and possibly longer.

The most prominent challenge in accessing a personal loan is that, because there is no security in the car enjoyed by lenders under HP and PCP agreements, credit approval rates can be lower, and interest rates can be higher for people with a lighter/poorer credit profile.