Think car finance is an easy way to acquire a car? In this day and age, you may want to think again.
Car finance has evolved over the years, and it’s not as easy as paying monthly until you own it (though, this is an option if you choose to). There are many possibilities for financing your next car.
For UK car buyers, you’ll find three main ways to make those all-important decision choices – and we’ve broken them down here:
1. Higher Purchase (HP)
Hire Purchase (or HP Finance) is the most traditional type of finance – one that car finance lenders have been offering for years.
You start the process by making a deposit before agreeing to a certain amount of monthly payments with a fixed interest rate. With this type of car finance, you have no mileage limitations or extra wear and tear concerns.
While it may not offer the cheapest monthly option, you will fully own the car once the final payment is made.
Those who suffer from potentially bad credit scores should look to HP Finance if they want to get approved for Car Finance, as it is very difficult to get credit for the next finance that we will explore.
In this case, it is always a good idea to try a soft search beforehand to see if you have a chance to get approved without further damaging your credit score.
2. Private Contract Purchase (PCP)
If you want to be flexible, personal contract purchase (PCP finance) may be for you.
PCP Finance is not set up to guarantee ownership – although it is an option – and most of the price of the car is actually tied to an optional final payment that once paid, the car will become yours.
Because of this optional payment at the end of the contract, the monthly payments will probably be cheaper than the HP contract and you are effectively paying to cover the car devaluation until you make that final payment.
A certain number of deposits and monthly payments where the match between HP and PCP ends. In addition to optional final payments, you will also need to set a mileage limit for the contract and monitor for any damage caused by normal wear and tear.
Exceed your mileage or cause excessive damage, and you will have to pay extra to cover the cost if you want to return the car.
Termination of the contract is also a big change from HP, as you get three main options:
- Make the final payment and take ownership
- Exchange the car for a new one using any car equity
- Move away completely
3. Private Contract Rental (PCH)
Personal Contract Hire (or PCH) is a type of car leasing. This may be a more suitable option if you want to replace your car more often.
Depreciation can often prevent you from buying a new car, but getting a car on private contract rental can crack the bypass problem. A car dealer can deliver you a new car every few years and you will have no hassle of ownership.
When you set up a car finance contract with a personal lease, you need to decide on your mileage limitations and the length of the overall contract. You will basically pay for what you use and can offer an advance payment (known as initial rent) to make your monthly payments cheaper.
After that, you start your monthly payments – you can even take advantage of some additional benefits such as maintenance packages that ensure your payments cover annual service.
Applying for money
You can often start your car buying journey with a free eligibility check. Many car companies have them and you can use them to verify your eligibility without any adverse effect on your credit score.
You can then progress and go through a complete finance application, which involves a hard credit check. At some point, each car finance lender will handle a solid credit check; However, if you have already verified your qualifications with positive results, you can confidently proceed to this stage and move your way towards a new car.