Car Finances Explained

An introduction to car finance

Owning a personal vehicle is a dream that almost everybody aspires to but, not everybody is fortunate enough to fulfil this dream. However, there are options around this like most big purchases in life, and this is called Car Financing. Here’s all you need to know about what Car Finance is….

Car finance is a way to spread the cost of a vehicle into more manageable monthly payments rather than pay in full outright, and the beauty is almost any vehicle can be financed. 

The process allows people who cannot purchase a car outright to keep one for themselves for a few years. After the agreement time is over, the owner has different options. They can choose to own the vehicle, return the car to the leasing company or simply trade the current one with a different one and renew his/her contract. Though, these options depend upon the type of car finance that you choose.

However, there is a solution to this problem and it’s what we call ‘Car Financing’. This system allows people who cannot purchase a car outright to keep one for themselves for a few years. After the agreement time is over, the owner has different options. They can choose to own the vehicle, return the car to the leasing company or simply trade the current one with a different one and renew his/her contract. Though, these options depend upon the type of car finance that you choose.

The question that you are probably asking yourself now is ‘What type of car finance suits me?’ Well, we will hopefully help you answer this question in the next article as we go through different options for people looking to finance a car as we explain the significant differences and the pros and cons of each option so that you can choose the best one.

But before we get into that, there are just a few things that should be on your radar before selecting. While the option of owning a car without having to pay the total price seems a little too good to be true, there are still some strings attached to these finance options. It would be best to consider these before you decide to use this finance option.

Have you got the funds?

First and foremost, you need to have a consistent income source, which will help you pay the monthly installments. You will not have to provide a large sum of money, but it does not mean that the car is free for you to keep. You need to have a fraction of the car's total price as an upfront payment and then monthly installments that will be decided in your contract.

Have you asked yourself these essential questions?

After taking care of the money, it is time to look at other essential things, such as do you want to own the car at the end of your contract? 

• Do you want to change to a different vehicle? 

• Do you need the car long term? 

• Do you only need to rent a car for some time? 

• What are the other options that are available to you? 

• What are the terms and conditions for these options? 

• What are the interest rates for these options? 

• What if you want to return the car? 

These are only some of the questions you should be asking yourself before making this critical decision.

What are my options when it comes to car finance?

So,  you’ve made  your decision and you have concluded that you are in the right position to finance a car, now let's look at your options.

When financing a car, you will have three options. The one you choose will depend on what you want to do with the vehicle. You can choose between:

• Personal Contract Purchase (PCP)

• Hire Purchase (HP) 

• Personal Contract Hire (PCH) 

These terms may look confusing and scary, but don’t worry, we are going to explain them all below!

PCP: The Good and The Bad

PCP stands for Personal Contract Purchase. This contract makes you the keeper of the car but you cannot be the official owner until the end of the agreement and decide to purchase the vehicle.

This type of contract allows you to keep the car without paying the upfront payment. You will have the option of purchasing or returning the automobile at the end. You will have to pay monthly payments and a balloon payment at the end if you decide to keep the car for yourself. Sounds exciting, right? But as with everything in this world, there are some strings attached.

There are many incentives to go with a PCP contract: 

• The initial deposit is low

• The monthly deposits are affordable

• You will have the option to purchase the car, return the car, or exchange it with a new one by entering a new contract

But there are also some not-so inviting aspects, such as:

• Lengthy Terms and Conditions

• Large balloon payment in case you want to buy it

• Mileage limit, interest charges

• You do not own the car during your contract term 

So, keep the good and the bad in mind before choosing this option.

Hire Purchase 

Another option you can go for is called Hire Purchase or HP. Hire Purchase is the go-to option if you want to own a vehicle, but you do not have the savings to buy it outright. This contract allows you to own the car, pay monthly for the car, and then own it at the end of your agreement.

The pros for this type of contract are:

• Fixed monthly payments (which do not increase with inflation) 

• Ownership of a car without having the money to pay for it. (The downside here is that if you fail to keep up with the monthly installments, someone will repossess the car and the monthly payments are usually higher than other options, although you can counter this by opting for a balloon payment at the end, which will allow you to have reduced monthly installments)

PCH or Leasing

PCH is short for Personal Contract Hire, is an option that allows you to lease a car for a fixed period. The difference between PCH and other options is that you will not have the opportunity to own the vehicle at the end of your contract, and you will have to return the car. 

This option is largely for people who do not have a large deposit lying around for a vehicle or are not planning to keep the car. Since you will not own the vehicle at the end, naturally, the initial deposit and the monthly payments will be a lot less compared to other finance options.

The advantage of choosing PCH is that you will only deposit 1-3 months payment initially and then pay monthly payments as you rent the car over a certain period. Not being the owner will allow you to not worry about the value depreciation of the vehicle. 

On the other hand, the clear disadvantage you will face is that you will never own the car, the Terms and Conditions of the contract will bind you, and there will be a mileage limit on the vehicle.

So, now that you know what your options are when it comes to Car Finance, it's time to get the car of your dreams (or not, perhaps it’s the one before the dream car)!