Article By Rob East

You’ve chosen your car, now to decide how to pay for it

When you want a pint of milk, you go to the shops with a couple of quid and come away with the bottle.

The milk is now yours and the money is now the shop keeper’s.

Most day to day purchases we make are as straight forward as this exchange, but when it comes to buying a car there are a couple of other options available.

You can still go to a car dealer, select your ideal vehicle, give them the money (which could be with a debit card, bank transfer or suitcase full of £5 notes) and drive away.

You own the car, just like you own the pint of milk that you paid for earlier.

But depending on the price of the car and how many £5 notes you can lay your hands on, you may prefer to go down the financing route where you pay it off over a period of time.

We’ll get to the two main options with this in just a minute, but first let’s be clear: this method of paying for something is nothing new.

If you have a house, chances are you have a mortgage. If you have a fancy mobile phone, you may well be paying for the handset in instalments as well.

Both of these are examples of finance payments that we are all familiar and comfortable with.

Car financing has a couple of particularly common flavours, each of which comes with pros and cons and which is best will depend on a number of factors.

In both cases however, it’s important to note that because you’re not buying the car outright, the finance company still owns the vehicle until the end of the contract. What this means in practice is that if you are unable to keep up with your repayments they are legally entitled to repossess your car.

Let’s take a look at both the two most common types of finance: Hire Purchase (HP) and Personal Contract Payments (PCP).

Hire Purchase (HP)​

This is most similar to the mobile phone contract example: you take the full cost of the car, take off whatever deposit you are paying, add on the agreed interest calculated over the duration of the contract (usually 36-48 months) and divide the total by the number of months.

Cost of the car - Deposit + Finance Interest / Number of Months

At the end of the Hire Purchase period, you have paid off the cost of the car and all the interest, and the car itself is now fully owned by you.

This last bit is important, as we’ll see in a minute.

Personal Contract Payments (PCP)​

This is very similar to HP but with one major difference: at the end of the contract you still don’t fully own the vehicle!

PCPs are worked out with an extra factor in mind, known as the ‘Minimum Guaranteed Future Value’, or MGFV.

As you’re probably aware, cars lose value as they get older, which is why you never get as much as you paid for your car even if you barely ever drove it.

This is called ‘depreciation’, and it’s what the MGFV takes into consideration.

It’s a bit of a guesstimate on the part of the finance company, but essentially they’re saying “well, we reckon that if you look after it, service it regularly and only do X number of miles each year, your car is going to be worth Y by the end of the finance contract.”

The finance is set up in a very similar way to a HP plan, with the list price of the car minus your deposit plus the interest, but also minus the MGFV.

Cost of the car - Deposit - MGFV + Finance Interest / Number of Months

Assuming you do indeed look after your car and stick to the agreed annual mileage, this has the effect of significantly reducing your monthly payments which makes PCP an attractive proposition for many motorists.

The key difference as mentioned earlier, is that at the end of the contract period you do not own the vehicle. Instead, you have two options.

Option 1 - Pay the ‘balloon’ payment of whatever is still outstanding on the contract (typically the MGFV). The car is then yours as you own it outright.

Option 2 - Give the car back to the finance company. If the market value of the vehicle happens to be more than the amount left on the finance (the MGFV), you can use this amount as a deposit against your replacement car.

Which is better - HP or PCP?

Neither is better or worse than the other, it all depends on what’s most important to you. If it’s important to own the vehicle at the end the contract then HP is going to be your best route, but if you want to minimise monthly payments and aren’t bothered about not owning the car, then PCP could be a better option.

Keep in mind that payment in full is still an option that many of our customers still choose. The price you see is the price you pay, with no interest, monthly payments or finance contract.

This is a very brief overview of the two most popular finance options and if you decided you wanted to explore them further then our sales team would be more than happy to explain more of the details and provide you with a couple of examples.

Currently, we’re seeing a very robust market for nearly new cars and some vehicles are worth more now than they were a year ago.

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