What are the different types of car finance?
There are a few different options available if you don’t want to purchase a car outright. Each of these options offer both positives and negatives. We have created the following grid to help explain these for you.
Finance Option | Deposit Required? | How much do you have to borrow? | Do you own the car at the end? |
Hire Purchase (HP) | Usually 10% of the car price (this varies from lender to lender) | Price of the car | Yes – once you pay a nominal ‘option to purchase fee’ at the end of your contact |
Personal Contract Purchase (PCP) | Usually 10% of the car price (this varies from lender to lender) | The value that the car will lose over the loan term | No – You will have a balloon payment at the end to own the car |
Personal Contract Hire (PCH or Leasing) | Three to six monthly repayments in advance | Set monthly payments to rent the car | No – you have to give the car back at the end of the contract |
Hire Purchase
Hire Purchase (HP) is a way of owning a car without paying for it all upfront. Typically, you will pay a deposit upfront and then the remainder of the balance, plus any interest will be split over a period of time.
You will have to borrow the full price of the car you are purchasing but at the end of the loan, you will own the car. You just need to pay a small fee at the end of the contract.
But remember the car isn’t yours until after the final payment. This means the loan is secured against the car, so if you miss payments, you could lose the car. Another snag with this option is that you will also be unable to sell the car while you are still making the payments, as technically you don’t fully own it yet.
HP is quite similar to another form of car finance called Personal Contract Purchase (PCP). However, the duration of a HP contract tends to be longer than a PCP and monthly payments may be higher.
Personal Contract Purchase
The amount you'll have to borrow is based on how much the finance company predicts the car will lose in value over the term of the deal (usually 24 or 36 months) minus the deposit you've put down. You’ll pay this amount off during the deal, plus interest. So, you’re not paying off the full value of the car. Typical APRs are between 4%-7%APR.
The balloon payment (a balancing payment you pay IF you want to own the car). Also often referred to as the Guaranteed Minimum Future Value (GMFV), this is how much the dealer expects your car to be worth after your finance deal ends. It's agreed at the start of your deal. You don’t have to pay this, as you get a choice of what to do at the end of the deal. But it is the sum you’ll pay if you want to keep the car.
Personal Contract Hire
Similar to Personal Contract Purchase, some people prefer leasing deals because you often get benefits such as road tax and breakdown cover included (and possibly servicing, but this is generally offered as an additional package). But there are some downsides to this.
For example, you never own the car. Also, the leasing deal will come with certain conditions, such as only driving a limited number of miles each year (this is agreed at the outset) and keeping the car in good condition.
Personal loan
Personal loans can also be used to help finance a car, and many people find one of these before they secure the finances needed before purchasing the car. Obviously this option means that you will own the car outright and will be able to sell it whenever you please, however you will still be making regular payments on the loan you took out.