Unlike general loans, car finance is structured with the vehicle itself serving as security. This means that, while you get to drive the car from the start, it technically belongs to the finance company until you’ve made all payments.
Types of car finance
1. Hire purchase (HP)
Hire Purchase is a straightforward finance plan. With HP, you usually pay a deposit and then spread the remaining cost over a series of monthly instalments. Since the finance is secured against the car, you don’t fully own it until the final payment is made.
The deposit is often around 10% of the car’s value, making it accessible for those with a bit of upfront cash. The monthly payments are fixed, so you know exactly what you’ll be paying each month. Once you’ve made the final payment, the car is yours to keep.
2. Personal contract purchase (PCP)
Personal Contract Purchase is a bit more flexible. Like HP, you pay a deposit and then make monthly payments. However, the payments are generally lower because they only cover part of the car’s value.
At the end of the agreement, you have three options: pay a final balloon payment to own the car outright, trade it in for another vehicle, or simply return the car.
3. Leasing
Leasing is essentially a long-term rental. You never actually own the car with leasing – instead, you pay a fixed monthly amount to use it for a set period. Once the lease is up, you simply return the car.
Leasing can be ideal if you want a brand-new car but don’t necessarily want the commitment of ownership. It’s also worth noting that maintenance packages are often included, making it a hassle-free option for some.
How car finance works
Once you’ve chosen the car you want and selected a finance option, the process begins with a finance agreement. The agreement details how much you’ll pay each month, for how long, and any extra terms, like annual mileage limits for PCP or leasing.
The lender will usually check your credit score to assess your ability to keep up with payments. A better credit score might lead to better rates, but options are generally available for different financial situations.
Payments are then made monthly, and you’ll have the car to drive throughout this period. If you miss payments, however, you risk having the car repossessed, as the vehicle is used as security against the loan.
Summing it all up
Car finance gives you the freedom to drive the car you want, without an overwhelming upfront cost. By understanding the different options and what each one involves, you can make a confident choice that aligns with your lifestyle and budget.
