Car Finance Explained

With more and more customers choosing finance to fund their car, it can be confusing to get your head around the different types. With several types of car finance available, it’s important to choose one that works for you.

Here, we explain the different types of car finance and the pro’s and cons of each.

​Personal Contract Purchase (PCP)

A PCP finance agreement allows you to take the car away in return for an initial deposit and a series of monthly payments.

The price of monthly payments will depend on several factors. This includes, the size of your deposit, the cost of the car and how much the dealer expects to be able to sell the car for when your agreement ends. You may see this referenced to as the Guaranteed Minimum Future Value.

At the end of your PCP agreement, you won’t own the car – you will simply hand it back to the dealer provided it’s in good condition. However, if you decide you want to keep the car you have the option to buy it outright - this is often referred to as the ‘Balloon Payment’.

Advantages of PCP:

  • Monthly payments are usually lower than other finance options
  • Your deposit can be flexible
  • You have no obligation to keep the car at the end

Disadvantages of PCP:

  • You don’t own the car after paying all monthly payments
  • You’ll need to pay extra for excess mileage beyond what was originally agreed
  • You’ll pay extra if the car doesn’t meet the set standards at the end of the agreement

​Hire Purchase (HP)

A Hire Purchase agreement is very much like a loan. After you have paid the initial deposit, the finance company will then loan you the rest of the money, which you will then pay back in monthly instalments. The size of your deposit and monthly payments will depend on the cost of the car, the interest rate and the length of your agreement.

Unlike a PCP agreement, there is no balloon payment at the end of the contract and you will own the car. Due to this, HP agreements do not include any terms and conditions like mileage or wear and tear.

Advantages of HP:

  • You will own the car at the end of the agreement
  • There is no mileage limit
  • You can choose the length of the contract

Disadvantages of HP:

  • Monthly payments are often higher than PCP
  • You won’t own the car until the final payment 

​Leasing (Personal Contract Hire)

When leasing a car, you pay a sum upfront, regular monthly payments and then hand the car back. It’s effectively a long term car rental. Once your term is complete you won’t own the car and you won’t have the opportunity to buy it outright – just the option to sign up to another agreement.

You’ll agree with your provider the term of the agreement as well as how many miles you’ll drive. One advantage is that many leasing companies will allow you to add servicing plans to your agreement, although this will increase your monthly payments.

Advantages of PCH:

  • Fixed cost
  • No depreciation to worry about
  • You don't need to worry about owning the vehicle

Disadvantages of PCH:​​​

  • You can’t keep the car
  • Your mileage is limited
  • You maybe liable for extra charges if the car isn't kept in good condition

Finance Jargon Buster

You may hear a lot of terms used in the car finance world that you don’t fully understand. Take a look below at some common terms and what they mean:

APR or Annual Percentage Rate – This refers to the amount of interest you’ll pay yearly on the money that you have borrowed.

Balloon Payment – This is the final payment at the end of the PCP agreement, meaning you own the car outright once it has been paid. In essence, it’s a large proportion of the loan which has been deferred from the monthly payments in order for them to be lower.

Credit History – information a lender will check in order to determine whether to accept you for a finance agreement.

Depreciation – The value that your car loses over time as a result of a number of factors including age, mileage, condition etc.

Equity/Negative Equity – Equity is when the value of the car is more than what you still owe on it. You can either pocket this money or use it as a deposit on your next car. Alternatively, negative equity is when you owe more on the car than the car is worth. You can settle the amount or see if you can transfer the amount to a new finance deal.

Mileage Allowance – At the beginning of your agreement you may be asked to specify how many miles you drive. If you exceed this, you will be expected to pay extra.

Minimum Guaranteed Future Value – The amount they deem your car to be worth at the end of your agreement.

Residual Value – The value of your car at the time you part ways with it.

Term – The period of repayment.

Deciding on the best way to fund the purchase of your next car can be difficult, which is why we’re here to make things easier. Get in touch with our friendly team here at Quest Motor Group to have all of your car finance questions answered.