Understanding Unsecured Loans

Are You Buying a Car on Finance?

The How’s of buying an auto on finance: pros and cons of PCP finance, Hire Purchase and PCH leasing. We will assist you to find the best financing option. 

Buying a new car is made simpler by car financing. Instead of saving up for many years, you can now buy a car and pay in monthly instalments that are affordable, made possible by financing. This financing arrangement will help you to pick a better car for the same monthly instalments and manage your budget easily at the same time.

With car financing, you have greater flexibility in payment terms. If you avail of Personal Contract Purchase (PCP) finance, you will not only get low monthly car payments, but you also have the option to return the car at the end of the contract or take the other option of making a final purchase payment for the car.

It’s a different arrangement if you opt for Hire Purchase (HP) – low-interest payments to buy and own the car. Another option, Leasing, is equivalent to long-term car rental with low monthly payments.

Under Leasing or Personal Contract Hire (PCH), there is no provision for a car purchase or ownership. You are to return the car at the end of the contract, and if you want to lease, start a new contract.

With strong market competition, customers benefit from low-interest rates for car finance deals. Also, other incentives such as no-deposit options, zero percent APR (0% APR) or interest-free credit (applicable for some new cars), and deposit contribution, are available. The numerous available options can be confusing. Continue reading to see what the best finance option can work for you.

Simply.co.uk works with several lender partners to make sure that customers receive competitive offers regardless of the circumstances you are currently in. 

Buy a Car on Finance: Compare Your Options

Personal Contract Purchase (PCP)

This flexible finance deal offers fixed and low monthly instalments for both new and used cars. At the end of the contract, you have three options: (a) return the car, (b) pay the optional final payment to buy the car, or (c) acquire a new car by trading it in by applying the value of the car over the remaining debt towards the next finance deal. The last option allows for easy and regular car upgrades.

 

HP or Hire Purchase

This finance deal, also called Conditional Sale allows you to distribute the cost of a new or used car every month in a fixed instalment amount. After making the last instalment amount, car ownership is automatically transferred to your name. The fixed monthly instalments are higher compared to PCP and this is because there is no large optional final payment to defer some of the cost. But in the final calculation, the interest you pay overall is still lower. 

 

Personal Contract Hire (PCH) or Leasing

This car finance deal is similar to a long-term car hire where the fixed monthly instalments are low. This finance deal is applicable only to new cars. At the end of the lease contract, you have to return the car as there is no final purchase payment option. 

If any of the above finance deal options are not applicable to your financial circumstances, an alternative option is applying for a personal loan. A personal loan does not offer low monthly instalment payments as in Leasing or PCP. It is more like the Hire Purchase finance deal.

 

Types of Finance

To compare the features of each type of finance deal and help you find the one that fits your needs and provides the best value, see the table below:

 Monthly PaymentsNo-Deposit OptionOwn Car at end of Contract? Mileage ChargesDamage Charges
LeasingLowerNoNoYesYes
HPHigherYesYesNoNo
PCPLowerYesOptional, with final paymentYes*
Yes*
Personal Loan (Bank)HigherYesYesNoNo
SavingsN/AN/AYes, upon paymentNoNo

*Only if the car is returned

 

Personal Contract Purchase (PCP)

Features: low payments and flexibility at the end of the agreement. 

  1. Deposit

    • A larger deposit means lower monthly instalments
    • You can check if a no-deposit option is available
  1. Monthly Payments

    • You will pay a fixed monthly payment for the duration of the agreement
    • Payments are lower because you only pay a portion of the car’s cost
  1. Buy / Return / Upgrade

You have three options to choose from:

  1. You can apply for refinancing if you want to continue to keep the car after the end of the agreement or pay the remaining balance so you can keep the car
  2. You can return the car at the end of the agreement and pay no more if you return the car in good condition and within the pre-agreed limit on mileage. 
  3. You can opt to trade in for another car if the car’s value is more than the remaining debt.

In other words:

The PCP finance deal combines the most appealing features of car financing – flexibility at the end of the contract, and low monthly payments. This car finance deal offers the biggest discounts and the easiest way to change and upgrade your car at the end of the agreement. This has become the most popular car finance option for new and used cars.

Under the PCP car finance deal, you have flexibility in adjusting the agreement term, mileage limit, and the deposit amount so you will have lower monthly payments that fit your budget. You can also avail of the no-deposit option but bear in mind that the absence of a deposit amount will increase the amount you will pay every month. 

The fact that you are only covering a portion of the car’s cost, this finance deal can afford to offer lower monthly payments. For the duration of the agreement, you are only paying for the value of the car it is expected to lose over the length of the agreement.

The difference between the price of the car at the beginning and the estimated value at the end is the optional final payment. This is the amount you will pay if you want to buy the car at the end of the agreement. It is also called a balloon payment, or the guaranteed minimum future value (GMFV).

At the end of the agreement under PCP finance deal, you can:

  • Make the optional final payment to buy the car
  • Apply for new financing to keep the car and pay a monthly instalment amount for an agreed length of time
  • Return the car without paying anything, provided the car is in good condition and within the agreed mileage limit

In most cases, the value of the car at the end of the agreement is more than the optional final payment. If this is your case, where the car you are returning costs more than optional final payment, you can trade in the car for a new car. The remaining amount on the value of the car will be applied as a deposit on the new car, thus, reducing the amount you will pay every month. 

PCP Finance: Too Good to be True?

If you compare this with Leasing (Personal Contract Hire), know that you are paying a little bit more for the flexibility. What it means is that PCH/Leasing offers lower monthly instalments but it offers less flexibility.

Under PCP, you need to return the car when the contract ends. You will also pay for penalties in case you return the car with damaged or not in a good condition. You will also pay a fine if you exceeded the agreed mileage limit. These conditions are the same for PCH/Leasing.

 

Hire Purchase (HP)

Features: Car ownership after final payment

  1. Deposit

  • A larger deposit amount means lower monthly instalments
  • Option for a no-deposit may be availed
  1. Monthly Payments

  • Pay for the remainder of the car in set monthly payments
  1. You own the car

  • After making the final payment, you own the car

The HP finance deal offers a simple concept: You pay for the cost of the car spread over monthly instalments for a specific length of time. On the last instalment payment, you will own the car.

If you want to lower your monthly instalment payments, you may opt to make a deposit or choose a longer agreement term. If you want to pay the car off over a shorter period, you will have to make a larger deposit amount.

In some cases, an HP finance deal is possible without a deposit. There are no penalties imposed on mileage limit or for car damages at the end of the agreement, provided you have completed your monthly instalment payments. Why? It’s because you are already the car’s owner as you have completed your payment. Click here for more details.

 

HP Finance Deal: Too Good to be True?

Under HP finance, monthly instalments are higher if compared with PCP or PCH/Leasing finance deals. The reason for this is that this car finance deal covers the full cost of the car, spread over the agreed number of months. 

The highlight of this car finance deal is owning the car once the final payment is made. Until ownership is transferred under your name, you cannot sell or modify the car without permission. This is almost similar to the PCP finance deal where car ownership is possible after completing payment for all monthly instalments plus the optional final payment. There is no guaranteed trade-in value for a new car because you are the legal owner of the car. 

 

Leasing (Personal Contract Hire / PCH)

  1. Initial payment

The initial payment (deposit) amount can range from 3 to 12 monthly instalments

  1. Monthly payments

  •       You will pay a fixed amount every month for the duration of the agreement
  1. Return the car

  •       Under this car finance deal, you will return the car at the end of the agreement

If you take this PCH/Leasing car finance deal, you have no plans of buying a car, but just using it for a specified period. You will pay a fixed monthly instalment until the end of the agreement.

This car finance deal offers the easiest and most affordable way of driving a new car. This finance deal is almost always available for brand new cars for an initial payment ranging from a minimum of 3 monthly instalments to a maximum of 12 monthly instalments. 

 

PCH/Leasing: Too Good to be True?

At the end of the agreement and after paying the last monthly instalment, you turn over the car in good condition. Otherwise, you will pay penalty charges if you return the car with damages as well as if you exceeded the mileage limit agreed upon. This car finance deal only offers you a reasonably cheap way of driving and not owning a car at the end of the agreement.

Like PCP, PCH/Leasing calculates repayments based on the specific car you choose. It will also factor in the speed or rate at which the car diminishes its value and your estimated annual mileage.

If this car finance deal is not fit for your budget, you may opt to take out a bank personal loan. But unlike PCH/Leasing or PCP, the monthly instalments may not be as low. The good thing is through a bank personal loan, the car is yours on the day you paid for it. 

 

Personal loan

Features: You drive and own the car right after making one big payment. You deal with the monthly repayments directly with the bank.

The advantage of taking out an unsecured personal loan is owning the car right away. This means you can accessorize or fit it with anything you want – tinted windows, big exhaust, or towbar. You are free to sell it anytime.

The other types of car finance are often hinged on the vehicle as security, which means you cannot sell or accessorize it until after all monthly payments have been fully paid, including optional final payment if you want to own the car. You will need permission to modify it. And you cannot sell it.

You may secure a reasonably competitive interest rate because of the prevailing competition among lenders. 

 

Personal Loan: Too Good to be True?

This option is not exactly the best finance deal because of higher interest rates for unsecured loans compared to other car finance deals. With a personal loan, you may not be able to take other types of loans or credit.

In general, car sellers can offer big discounts for customers availing of a car finance deal. Hence, taking out a personal loan to pay for the car will not qualify you for low-interest rate offers or deposit discounts which are often made available for new and used car finance deals.

With a personal loan, you are also paying for the full cost of the vehicle. This will undoubtedly make for higher monthly repayments compared to PCP or PCH/Leasing car finance deals. PCP offers more flexibility in terms of monthly repayments and the option to own the car at the end of the agreement.

 

What You Need to Know When Buying a Car on Finance

Some of the things you need to know right off the bat are:

Compare the Right Interest Rate

Usually, every finance agreement has two interest rates:

  1. The Base Rate – this is the interest charged on the loan.
  2. The APR Interest Rate – this includes arrangements fees and other charges. By looking at this APR Interest Rate, you can compare the real financing cost between lenders.

Determine the Total Amount Payable

Some factors at play here are:

  • Is it a Zero Percent (0%) financing?
  • Is it a higher interest rate for a bigger car price discount?

You should see the total amount payable over the course of the agreement on the finance quote. If you have this number, you can compare deals from different lenders. Keep in mind though, that the total amount payable does not include deposit contribution discounts. Make sure that you take in all the numbers in order to compare properly.

For PCP finance deals, you can check the overall cost by multiplying the monthly instalments by the agreed total number of payments. Then add the deposit amount plus any other initial contact costs. The number you get is the amount you will have paid when you return the car at the end of the agreement, provided, of course, that the car has no damage and you have not exceeded the mileage limit.

If part of your plan is to buy the car at the end of the finance agreement, make sure to add the optional final payment amount plus all the required compulsory charges to buy the car. 

For Hire Purchase or a Bank Loan, you can calculate the total amount payable by multiplying the monthly instalment amount by the total number of payments agreed in the contract. Then add the deposit amount plus other compulsory charges. You will then see and compare which deal gives you the best terms.

 

Buy or Lease a Car?

The decision will depend a lot on your long-term plan: do you want a car for temporary use or do you want to own it at the end of the agreement?

If you only need to use the car for a short period, PCH/Leasing and PCP maybe your best option. Both finance deals offer low monthly instalments, and at the end of the agreement, you can return the car with no other payment to make. Again, the two conditions of no-damage and not exceeding the mileage limit must be complied with so as not to pay penalty charges. You also have the option to get a new car for a new finance or leasing deal.

On the other hand, if you want a car for long-term use and buy it at the end of the agreement, you may choose the Hire Purchase car finance deal. Under this finance option, you will own the car after the final payment is made at a much lower overall cost compared to a PCP car finance deal.

 

Credit Score

Finance companies and lenders usually refer to your credit score to determine the risk of lending money to you. If you have a high credit score, you will likely be offered the lowest interest rates and monthly instalments. However, this is not to say that finance is not available for those with low credit scores. 

If you have a poor credit score and history, you can still avail of some affordable financing such as Young driver finance which helps people aged 18 – 21 years old to purchase a car. They will have to show that they can afford the repayments.

If unsure about how your credit score will impact the deal you are aiming for, check out our guide to determine if your credit score can afford you a car finance deal. 

 

Can You Get the Best Deal When You Buy a Car on Finance? 

The only way to know this is by determining the total amount payable at the end of the agreement, regardless of the type of car finance deal you are choosing. The total payable amount should include all – monthly instalments, deposit or initial payment, optional final payment amount, and any other compulsory charges.

See the table below. It shows the amount you can save in interests if you go for a shorter finance period, but with higher monthly instalment amounts. 

Car ValueInterest RateHire Purchase Agreement LengthMonthly InstallmentsTotal Amount Payable
£10,0007.9%5 years£201£12,060
£10,0007.9%3 years£312£11,232

Considerations:

Car Value

In some cases, the car will cost less under a finance deal than a cheaper-priced car. There is no error here. What is factored in here is the diminished value of the car over the agreement period which is the basis for the monthly cost of PCP and Leasing. Hence, a car that keeps a high value over the lease period will cost less than a car that loses its value more.

Finance Term

With a longer finance term, you will have lower monthly payments. But in the end, the total amount payable will be higher. A longer finance term means you will be borrowing money for a much longer period and this means more accumulated interest payments. If you opt for the PCH/Leasing, this will be your scenario. To have lower monthly instalments, you need to extend the period of time at which to pay the borrowed money. This will give you a higher total amount payable because you are leasing the car for a longer time.

Deposit

You should know by now that if you make a large deposit amount, your monthly payments will be lower. You will also have a lower interest rate because you are borrowing less money for the duration of the agreement. If you have budget restrictions, there is also the option to get a car with no deposit finance.

Interest Rate

A high credit score will land you a low-interest rate. And this will keep your monthly instalments low. 

 

Is it Possible to Cancel the Agreement Early if the Car is on Finance?

This is possible especially if there are changes in your financial circumstances, making the PCP or HP monthly instalments unaffordable.

It’s also possible if you need a different car, but you need to settle the agreement earlier than the agreed term. This means you will ask your lender what your final settlement fee will be – a one-time payment amount you need to settle to terminate the contract.

If the value of the car is more than the settlement fee at the time of early termination of the agreement, you have the option to sell or part-exchange your car for another car without difficulty. A discussion with the lender is necessary because they own the car. And part of the proceeds of the sale will be paid to the lender to cover the settlement fee. If there is surplus money after paying the lender, it will be returned to you or used as a deposit or monthly instalments for your next vehicle.

If the settlement fee is higher than the value of the car at the time of early termination of the agreement, you will have to use your funds to make up for the difference. Negative equity finance, in some cases, can help spread this cost. The difference will be added to the finance for your next vehicle and make one month to cover both the settlement fee and the difference. If the value of the new car is lower than the previous one, this can still reduce your monthly instalments.

You must understand that terminating a lease is not always as easy. In most cases, there is a settlement fee to pay. This may be an amount equivalent to the remaining monthly instalments. In the end, you will realize that it will be better if you just continue using the car and making the monthly payments until the end of the agreement rather than returning it but still paying the remaining monthly payments.

Alternatively, you can check the option of refinancing your current car before the end of the agreement. Take note though that you may pay extra charges if you opt for this. Explore the possibility of switching to a better deal with a lower interest rate which means the lower instalments will be more affordable.  

In the case of PCP or HP finance deals, paying it off early will turn out to be cheaper than carrying on with the monthly instalments as you will have less interest to pay for. In most cases, a one-off settlement amount that includes some of the interest that the lender didn’t cover will serve as the pay-off amount.

Taking out HP or PCP finance means you have the option to end the agreement under the provision of a voluntary termination as provided in the 1974 Consumer Credit Act. This comes with no penalty if:

  • you have paid more than 50% of the total amount owed (including the optional final payment to buy the car as in the case of PCP finance deal)
  • you have no outstanding (late) monthly payments

The agreement may also be voluntarily terminated at an earlier stage but you will pay a lump sum payment that will make the total amount you have paid to 50% of the total cost of the agreement. 

 

If I Crash a Car on Finance, What Happens?

Cars on finance are usually covered by comprehensive insurance, to cover for repairs.

The insurance payout should take care of the value of the car at the time of the crash and if the car is written off. The payout will go to the finance company since technically they own the car on finance.

If the insurance payout is lower than the amount owed to the finance company, you will have to cover the difference with your own money. An alternative is to take out a guaranteed asset protection (GAP) insurance to pay for the difference.

Some insurance companies offer coverage for new car replacement. For example, if a car is written off in the first year of owning it, the insurer will cover the cost of a brand-new car replacement. Your debt to the finance company is likely to clear off.