Finance Explained
Do you get confused with the finance jargon when looking into purchasing your next car? Take a look below where we have explained it for you to give you a clearer understanding of what your different options are.
Hire Purchase (HP)
If you want to fully own the vehicle at the end of the agreement then HP will be the best method for you. With HP you will pay an initial deposit followed by monthly instalments for a set period of time, the monthly instalments are calculated from the remaining value of the car after the deposit including any interest on the finance.
HP has the benefit of having the full price of the car covered by the monthly payments so at the end of the agreement you will own the car. Furthermore you will have no limit to your annual mileage which is a factor in other financing methods.
As you are paying off the total value of the car your monthly instalments will be higher than other methods of financing and you will not fully own the car until your final payment has been completed. During the agreement period you may not sell the car without settling the finance.
Pros:
- Less interest charged (provided the same APR)
- Longer-term options make car ownership affordable
- Very simple with no excess mileage or damage charges
Personal Contract Purchase (PCP)
Like Hire Purchase, PCP is a finance agreement where you place a deposit (ranging from zero to a maximum 35%) and is then followed by a period of monthly instalments (you will also need to select an annual mileage allowance which must be kept to or you will be subject to an excess mileage charge) – set between 24 to 48 months - however with a PCP agreement there is a final payment due at the end of the term. This may sound strange however a PCP agreement usually gives a lower monthly payment than a standard hire purchase agreement and that means that you can get more car for your money and you retain far more flexibility. At the end of a PCP agreement when the payment is due you have a choice of 3 options;
1 : Hand the car back to the finance company subject to certain criteria (condition of car, mileage)
2 : Part exchange it for a new vehicle we will do a thorough appraisal of the vehicle and if it is worth over the Guaranteed Minimum Future Value (GMFV )amount this can be used as deposit towards a new vehicle) or
3 : Make the final payment to purchase the car outright. You can still change your vehicle at any time during the agreement by settling the finance in exactly the same way you would with a HP
The size of the final payment is determined by the GMFV which is set (by the finance company) when you put the deposit down for your finance agreement. This means that in your monthly instalments you are not paying off the value of the car just the difference between that value at the start of your finance and the estimated minimum value at the end of your finance.
GMFV is calculated based on many factors such as; Make, Model, Desirability and therefore resale value, length of term for any finance and the agreed annual mileage. If the car is worth more than the GMFV at the end of the agreement you can use the additional value towards the deposit of a new car. If the car is worth less than the forecast value you can hand the car back and there will be no negative equity loss to the customer.
Pros:
- Lower payments than a HP agreement with the same term
- Nil and low deposit deals suit a PCP
- Greater flexibility
FAQ
Why does increasing the mileage allowance increase the monthly instalments?
To successfully estimate the end value of a vehicle the mileage will have to be taken into account, the higher the mileage of a vehicle the lower its value will be at the end of the agreement. Often there will be a charge per mile for going over the set allowance. This cost is the difference per mile that the vehicle will be valued at the end of the agreement from the original end value.
Can I settle my PCP deal early?
Yes we are happy for you to trade in any PCP deal early, taking in consideration the current value of the vehicle and how much you have paid so far. If you have paid in more than the current value of the vehicle then the difference in price may go towards you’re the deposit for your new car. We will try to help and offer you advice if your car is worth less than the current settlement figure.
What is APR?
APR stands for Annual Percentage rate and is typically stated as a yearly rate. APR is a broader measure that encompasses not only the interest charge but any other fees that may apply to the borrowing of finance giving you an easy to compare end figure.
What should I do if I am exceeding my mileage allowance?
If you are exceeding your mileage allowance, perhaps because your circumstances have changed, then contact us and we will look at ways we can adjust your contract to suit.