More than 91% of new private cars are bought with the aid of car finance, says the Finance and Leasing Association (FLA).
According to Auto Express, by far the most popular form of finance is Personal Contract Purchase (PCP), which is used by an estimated 78% of those using car finance. Some 10% of finance users opt for hire purchase agreements to buy their car. A smaller number of consumers may choose a lease purchase arrangement.
So, the following tips and suggestions may help to distinguish the benefits and advantage of the various car finance options when deciding which might be suitable for you:
Personal Contract Purchase (PCP)
- the widespread popularity of PCPs lies in their flexibility and the option to proceed with the purchase of the vehicle at the end of the agreement or simply hand it back to the finance company, with nothing further to pay;
- the first stage of the agreement involves your putting down a deposit – agreed with the franchise or dealership – and the bigger the deposit, the less you need to repay each month;
- the monthly repayments are typically calculated on the basis of the car’s expected depreciation over the life of the PCP – so in those monthly repayments you are only purchasing around a third of the car’s list price, making your PCP instalments somewhat less than if you were buying it outright;
- at the end of the agreement you may pay the final “balloon” payment representing the predetermined Guaranteed Future Minimum Value (GFMV) or simply return the vehicle;
- many dealers may also take the vehicle in part-exchange, accepting any equity you have acquired in the car as a deposit on a new car, under a new PCP – so allowing you to drive a new car every three, four, or five years;
- an article in AM Online on the 1st of March 2019 explains the somewhat complicated implications of a recent change in the way HMRC intends to charge VAT on PCP deals;
- hire purchase agreements, on the other hand, are based on your completing the purchase of the vehicle – but spreading the repayments evenly over a three to five year period;
- an initial deposit is required – typically around 10% of the purchase price, but the bigger your deposit, the less expensive your monthly repayments;
- the balance of the purchase price is generally paid off in equal monthly instalments, although some hire purchase agreements delay at least part of the repayment by incorporating a final “balloon” payment – so reducing the cost of the regular monthly instalments;
- ownership of the vehicle passes to you when the final payment has been made and you may not sell the car until the balance of any hire purchase has been paid;
- this car finance option is just as it says, a combination of payments for its lease, followed by a final payment for its purchase – effectively delaying or deferring your payment for the car;
- typically, up to 31% of the final payment may be deferred and is usually based on the residual value of the car at the end of the agreement;
- unlike a PCP, a lease purchase agreement does not give you the option of simply handing back the car – you are obliged to complete the purchase, if necessary, through re-finance such as hire purchase.
With a number of established and well-proven car finance options available, it is little wonder that these have become the almost universally favoured methods of acquiring a new or used car.