There are more options available now to secure a new or used car than ever before from a finance perspective. Buying or used car outright can be extremely expensive, so you can now go for a pay monthly solution instead. Options include leasing a car for a set period, personal contract purchase and hire purchase.
What’s the difference between the finance models?
When buying your car, have a think about how many miles per year you think you’ll do in that car. With most options, the monthly payments often cover the amount a car will depreciate over the term of the contract, so this is a critical consideration. Also consider whether you want a new car or used. Even used cars can be purchased through some websites using the below options.
There are hundreds of leasing websites available for you to take a look at. You simply select which car you’re interested in, how many miles per year you’ll cover, the length of contract you want (2-5 years is the standard) and you’ll be given a basic price per month. On completion of your contract, the car will be returned to the leasing company and your monthly payments will stop. You’re effectively paying to use this car for the contract term and that’s it. With this option, you’ll never own the car, but it’s a great way to get a new car for a relatively small monthly cost, which can be as low as £150. To protect yourself further you can also add on maintenance packages, so things like servicing and MOTs are also included.
Personal contract purchase (PCP)
Personal contract purchase (PCP) plans have become very popular in recent years, because they take a lot of the hassle out of car ownership – but as you might expect, they’re not the cheapest way of getting on the road.
With a PCP you’re effectively just funding the depreciation on your new car, and unless you buy the car at the end of the contract, you never get to own it.
It’s a bit like perpetually renting a home rather than getting onto the property ladder; you could view it as dead money or as a way to get on with your life rather than being bogged down by the realities of ownership.
This is how a PCP works:
- As with hire purchase, you pay a deposit and monthly instalments; the difference is that the monthly payments are generally lower.
- PCPs are popular as many schemes include maintenance in the price. While new cars need very little in the way of maintenance, if you keep the car for (say) four years and you go right up to the mileage limit, the garage bills could be a bit steeper. But you’ll always be paying for the convenience so a PCP will never be the cheapest option.
- There’s a final payment called the minimum guaranteed future value (MGFV), also known as a balloon payment. This is usually a large sum, which means you either have to stump up to buy the car outright, walk away with nothing, or swap to another PCP scheme to keep you on the road.
- There’s usually a mileage limit, which can’t be exceeded without the payment of a stiff penalty at the end of the contract.
Hire purchase (HP)
With tough competition from the high street banks, many manufacturers and dealers are hitting back with attractive hire purchase offers.
These are a cross between a loan and a PCP, in that you have to pay a desposit, but the rest of the loan is then just paid off over a pre-determined period. The key thing is that until the car is fully paid for, it doesn’t belong to you; if you default on the loan, your car will be repossessed. The most important points about hire purchase are that:
- This is the most popular way of paying for a new car, with a huge variety of lenders offering personal loans – so shop around for the best deals.
- You choose how long you take to repay the loan and there are no restrictions on the type of car you buy or how many miles you cover – you also don’t need a hefty deposit up front.
- The car will also be yours from day one, but bear in mind that your car will be repossessed if you don’t keep up the payments on it.
- Often, the more you borrow, the better the interest rate you’ll be offered. But you’ve still got to pay the money back (with interest), so don’t get carried away by just looking at your monthly outgoings