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Types Of Car Finance

The evolving car industry offers a wide variety of vehicle types in all shapes and sizes with the latest cutting edge technologies. There is so much choice out there and more people are choosing to finance rather than outright purchase wether it is a used vehicle or something brand new. We want to explain all of the finance options available today along with pros and cons so you can make an informed decision on what is best for you.

Leasing (Contract hire)

Commonly know as leasing, PCH or BCH is similar to hiring a vehicle but over a longer term usually between 2 and 4 years. When choosing this type of finance you get a selection of all new makes and model of vehicles. Generally Leasing is the most popular option for people in the UK looking for a new car because it offers the lowest monthly payments in comparison to other finance types.

Positives

No or low down payment - You can choose how much initial payment you put down. If you put down a higher initial payment the monthly payment will go down. Regardless of how much you put in upfront, the total cost stays the same so it is fair to everyone meaning you wont have to pay more over the agreement by putting in less money upfront.

Manufacturers warranty - Lease vehicles are either brand new or pre registered and all come with the remainder of the manufacturers warranty which means if there are any mechanical issues with the car which fall under warranty then you wont need to cover the cost.

Low monthly payments - Leasing gives you the lowest cost on monthly payments in comparison to other finance types because you only pay the depreciation of the car. These monthly payments are fixed and wont change over the contract.

Road tax is included - As it is a form of hire the lender owns the vehicle so they are responsible for road tax for the full term of the agreement which can be a huge saving on money with todays pricey tax’s.

Free UK delivery - All of our lease deals include UK mainland delivery to your front door or wherever you need it on the day.

No hidden costs - All costs are displayed on the finance documents before you enter in to the contract so you know exactly how much the car will cost.

Easy Budgeting - Fixed costs allow you to budget exactly what you will be paying over the term of a lease. There is an optional maintenance package with this vehicle finance type which includes tyre repair and replacement all for an affordable monthly payment giving you peace of mind that there will be no nasty surprises on mechanical or service costs.

Negatives

Excess mileage penalties - If you exceed the contractual mileage then there will be fees to pay. It is important you check what the charges are before entering the contract. If the excess mileage charge was 7P per mile then you will know its £70 for every 1000 miles you go over when it is time to hand it back.

Fees for damages - At the end of the agreement when you hand the vehicle back to the finance company, if there are any damages which exceed fair wear and tear you will be charged for this which can be expensive due to the charge being made up of the damage and also the finance companies time to fix the damage. (We would recommend you fix the vehicle before handing it back so that the repair bill is as low as possible).

Generally Higher insurance premiums - Insurance companies see a lease car as a greater risk due to it not being owned by the driver so it could be more prone to getting dents and scratches.

Personal contract purchase (PCP)

PCP is a type of finance where the lender sets a guaranteed future value of the vehicle at the end of the agreement which then reflects the amount you will pay. It is broken down in to 3 sections which are:

Deposit - You can choose how much you put down at the start which will make the monthly payments higher or lower depending on the size of the deposit.

Monthly payments - You choose how long you want the contract over which will effect the total cost over the agreement. The most popular lengths of contract on PCP range between 3 and 4 years however you can choose a shorter length of time if you wish but the monthly payments will be higher. Annual mileage also has an effect on the monthly payments because the more you do the less the vehicle will be worth at the end.

Guaranteed future value (GFV) - At the end of the monthly payments you have an optional final payment if you wish to buy the vehicle. This is set by the finance company and is a prediction of what it will be worth based on its age and mileage at the end of the term.

Personal contract purchase gives you flexibility of 3 options at the end of the monthly payments which makes it a popular finance type for people in the UK. They are:

Retain - This is where you can buy the vehicle by paying the balloon payment (GFV) at the end of the monthly payments. After this has been done the contract will end any the vehicle is all yours.

Return - At the end of the monthly payments you can hand the car back to the finance company with no additional costs providing it falls in line with fair wear and tear guides and you haven't exceeded the contract mileage limit.

Renew - At any time in the contract you can trade the vehicle in to the dealership to get a different maybe newer or better vehicle. The sooner you decide to do this there is a chance that you could be in negative equity meaning the car is worth less than the outstanding balance on the contract. It is best to wait until nearer the end of the contract to renew in most cases.

Generally renewing is the most popular option on PCP because people want to get a new car on a regular basis so that they are not paying higher maintenance costs to keep it on the road.

Positives

Flexible payments - Changing the length, mileage and deposit on the contract will change the monthly payments so you can adjust it to be affordable to you.

Option to own the vehicle - If you really like the car and want to keep it at the end of the agreement you can buy it for the price of the GFV.

Chance to build equity - When it comes to keeping the car or part exchanging it there is a chance that the car could be worth more than the outstanding finance which you can roll on as a deposit for your next vehicle.

Low monthly payments - Because there is a final balloon payment a large sum of the cars value is held back until the end which means the payments are lower than hire purchase or Bank loans where you would pay off the full value of the car over the term of an agreement.

Guaranteed future value - If the car has an unexpected fall in depreciation you can simply hand the car back to the finance company at the end of the contract so that you are not effected by the loss financially.

Maintenance costs - PCP’s are only on new and not too old cars so you can avoid the harsh maintenance costs to keep a much older car on the road. Usually dealers will throw in service plans to the deal which keeps the cost of ownership down whilst you have it.

Negatives

Extra mileage charges - If you decide to hand the car back to the finance company at the end of the contract and you have exceeded the agreed mileage then you will be liable to pay the costs of the excess mileage.

Fees for damages - If you decide to hand the car back to the finance company and its condition falls outside the fair wear and tear policy then you will have to cover the costs to bring it back to a satisfactory condition.

Large balloon payment - If you decide you want to keep the car then you will have to make a big outlay at the end to settle the finance.

Hire Purchase (HP)

Hire purchase is a type of finance where the full value of the vehicle is spread across the agreement plus interest. The total cost of a hire purchase can be lower than PCP as the interest you pay is less however you need to be able to afford the higher monthly payments to be able to take out this type of contract. It is set up very much like an every day loan and is available through most finance companies and all dealerships.

Positives

Ownership of the vehicle - Once the monthly payments have all been made you own the vehicle and the shorter the agreement, the quicker you own it!

Spread costs - Rather than having a big outlay buying a vehicle outright this can be a good option as you can spread the balance over a fixed period of time.

Flexible payments - The amount you put down as a deposit and the length of the contract you choose will determine how much you pay on a monthly basis. If you have a larger deposit to put down and good credit history you could be illegible for some low rates of interest.

Early repayment - You can over pay on your monthly payments to own the car quicker which will also reduce the amount of interest you pay.

Negatives

Higher monthly payments - As you are paying for the full value of a vehicle over a period of time the monthly payments are much higher in comparison to Leasing and PCP. 

Higher interest rates
- Interest rates are set by the finance companies which can sometimes be higher than a Bank loan.

Bank Loan

This is where you borrow an agreed amount from a main bank like your own over a period of time which can be set by you. It is normal for bank loan interest rates to be lower if you agree a shorter length of time to pay back the money.

Positives

Low interest - Interest rates are usually the lowest available when financing a vehicle through your bank.

Ownership of the vehicle - Once to payments are all made you own the vehicle so this can be a quick option to paying it off as quick as possible. As the loan is agains yourself and not the asset you are free to sell the vehicle whenever you like to clear the finance.

Flexible monthly payments - Monthly payments are determined by the amount you borrow and how long the contract is set over.

Negatives

Availability - Not everyone will be accepted for a bank loan as you have to have good credit if you want to take out a low interest rate loan.

Depreciation - If the car looses a lot of value over time the money comes out of your pocket when you come to sell it.

Maintenance costs - you are the registered keeper and owner of the vehicle so will be responsible for annual maintenance costs and repairs which can add up, especially if you are buying an older vehicle which is no longer in warranty and requires annual MOT’s.

Here at lets talk finance we specialise in all vehicle finance types so you have come to the right place. Our main focus of business is Leasing however we have built strong relationships over the years with national lenders and Main dealers so can facilitate any finance option that could possibly appeal to you. For more information on all of our fantastic deals why not give our team of experts a call on 01625 568 612 or email sales@letstalkfinance.co.uk

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8th of April 2020

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