A beginners guide to car finance

In recent years, paying for a car through car finance is much more common than paying for the car outright. 

However, it can be a challenge to navigate the world of car finance...

In this short blog post, we are going to give you a clear overview of car finance options with examples to get you on the road with your new car. 

Let's start with the different types of car finance... 

The three most common options for car finance are Hire Purchase, Personal Contract Purchase and Leasing! 

Hire purchase (HP)

Hire purchase (HP) makes sense for those who know they want to own a car. 

The cost of the car is spread over a series of fixed monthly instalments, usually across two to five years.

Example:

If the vehicle is priced at £25,000 then it would cost £29,304.40 in total (at 6.9% APR). 

You would pay a £1000 deposit and then 60 monthly instalments of £471.74. 

This means that you will be paying £4,304.40 in interest to purchase the car. 

You could choose to pay a larger deposit and then the monthly instalments would go down. 

Personal Contract Purchase (PCP)

PCP is basically a loan to help you get a car. But unlike a normal personal loan, you won’t be paying off the full value of the car and you won’t own it at the end of the deal (unless you choose to pay the final balloon payment).

Example: 

Let's imagine you sign up for a PCP over three years. The car costs £20,000 and the finance company calculates that the car will be worth at least £8,000 after three years. Here is what that deal would look like…

You pay a 10% deposit, eg, £2,000 with a loan for the rest, so £18,000
You then owe £18,000. Though, as it's been agreed that the car will be worth £8,000 at the end, you only need to repay £10,000 (plus the interest on the entire £18,000) over the three-year period
At the end of the agreement, you either pay the final £8,000 to keep the car or you can choose to hand the car back

Importantly, even if you hand the car back, you will still have paid interest for the full loan amount (£18,000) over the three-year period.

Personal Contract Hire PCH

Also known as Leasing a car, which in the trade is known as 'Personal Contract Hire’ (PCH). 

Technically speaking this does not count as car finance as it is more like a long-term car rental. However, it is becoming increasingly popular in the last few years. PCH is quite like PCP however you do not have the option to purchase at the end of the contract.

This option is similar to when you hire a car on holiday, but in this contract, it is just for a longer period of time. 

We are here to help
 
The most important thing for you to remember is that you have options, if you are unclear on any details, run it by your finance agent. 

If Shokarz can be of any help or assistance, please feel free to give us a call 01926 498434