Which Type of Car Finance is Right For You?

Over the years, car ownership has evolved from a rare privilege to become the everyday norm. According to the latest figures from the RAC, more than 75% of all homes have at least one car.

Back in 1971, the figure stood at a little over 50%.

For most people, buying a car represents one of the biggest expenses incurred during their lifetime. On average, picking up a new car in the UK will set you back at around £15,000. Set your sights on something more sophisticated, and you can easily spend £20,000 to £50,000.

In which case does widespread car ownership mean people, in general, are wealthier than they were 50 years ago?

The short answer is no; it is simply a case of more flexible car finance deals being on the market today.

A Popular Choice for Vehicle Purchases

Estimates suggest that, on average, around 900,000 new cars and 1.5 million used cars are bought on finance each year.

Specialist vehicle finance provides the everyday buyer with the opportunity to spread the costs of their car over several years. Rather than being expected to save £15,000 and pay for a car outright, finance distributes the costs over a series of monthly payments.

It is not until you begin shopping for car finance deals that you realise how many different types of finance are available, each with its unique points of appeal.

With this in mind, here is a brief overview of the four most common types of vehicle finance and their main features:

Personal Contract Purchase (PCP)

With a PCP contract, the customer pays a deposit of around 10% to take possession of the vehicle. After which, regular monthly repayments are made over the course of the agreed term, which is usually 24 to 36 months.

When the term comes to an end, the customer will have the option of taking full ownership of the car by making a final ‘balloon payment’. Alternatively, the customer can start a new PCP contract on a newer car with the same provider or hand the car back to the car finance company and bring the deal to an end.

This is a popular option due to its flexibility and the fact that the monthly repayments on a PCP contract can be surprisingly low. However, you do not take ownership of the vehicle until the final balloon payment has been made at the end of the agreement. In addition, annual mileage limitations will usually be imposed, over which charges may apply for additional mileage.

Around 80% of all new cars sold in the UK are purchased by way of PCP agreements.

Personal Contract Hire (PCH)

This is essentially a long-term rental contract, with no option of taking ownership of the vehicle at the end of the agreement. A deposit is paid to take possession of the car, after which fixed monthly repayments are made for the duration of the contract.

Personal contract hire accounts for around 10% of new car sales in the UK, but the vehicle is always handed back to the provider after the agreed term. One of the biggest benefits of PCH is the option of adding maintenance and upkeep costs to the monthly instalments you pay. In doing so, you never have to worry about paying for vehicle repairs or maintenance ever again.

It can also be an affordable alternative to car ownership, given how you never technically own the car you drive.

Hire Purchase (HP)

Hire purchase works in a similar way to PCP, in that the buyer pays an initial deposit followed by a series of monthly repayments. There is often a degree of flexibility with regard to the size of the deposit, larger deposits resulting in smaller monthly instalments.

The biggest difference with HP lies in the fact that no balloon payment is necessary at the end of the agreement to take ownership of the car. The vehicle’s full value is gradually paid off as the monthly repayments are made, resulting in ownership of the car transferring to the driver at the end of the agreement.

The service provider remains the legal owner of the car until the agreement comes to an end. During which you cannot sell or make any modifications to the car, but you are still responsible for its maintenance and upkeep.

Conditional Sale (CS)

The final of the four car finance options is a conditional sale, which is essentially a personal loan issued specifically for purchasing a vehicle. Once again, the agreement involves paying an initial deposit and making a series of fixed monthly repayments over the course of several years.

As with HP, legal ownership of the vehicle is only transferred to the customer when the final instalment has been paid. The deposit requirement is usually around 10%, and the loan is charged at a fixed rate of interest, agreed at the time the contract is signed.

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