Personal finance options guide

In this guide we discuss the different ways to finance your car. Personal contract hire, personal contract purchase, hire purchase and lease purchase are discussed in detail.

Personal contract hire (PCH)

Personal contract hire (PCH), also known as personal leasing, is an effective way to get instant access to a new car without having to worry about a large cash outlay. This simple arrangement allows your car of choice to be leased at an affordable monthly cost, without you having to worry about the effect that depreciation has on your vehicle.

How personal contract hire works

You pay a monthly rental to lease a car over a set period, typically between 12 and 60 months, with a flexible initial payment structure of either one, three, six, nine or 12 months paid after delivery. The vehicle is then returned at the end of the term. This arrangement offers all the benefits of owning a new vehicle but at a much lower monthly cost. Annual mileage requirements, servicing and maintenance options can be customised and included within your monthly payment. At the end of the term the car will be picked up so there’s no hassle with selling it privately or to a garage.

Why choose personal contract hire (personal leasing)?

  • You can have a newer, higher specification car than you may have been able to afford outright otherwise
  • VAT isn’t paid on the car’s initial purchase price and these savings can be passed on through lower monthly rates
  • No ownership or depreciation risks
  • You don’t need to resell your vehicle when you’re ready for a new one
  • A fixed cost of motoring
  • Road tax is normally included in the initial contract
  • A shorter leasing period allows for the manufacturer’s warranty to cover the vehicle
  • You can opt for maintenance to be included within the lease

Further considerations

  • The vehicle must be returned in a well-maintained condition in line with ‘fair wear and tear’
  • Early termination can be expensive
  • You must have fully comprehensive vehicle insurance
  • You will never own the vehicle
  • VAT is non-reclaimable
  • Recharges can be made for any damages that are not covered by BVRLA ‘fair wear and tear’
  • A charge would be made for excess mileage if the contract mileage is exceeded

Hire purchase (HP)

A hire purchase (HP) plan is a very popular and flexible way for people to acquire the vehicle they want immediately and to take ownership once the value has been fully repaid. Hire purchase is similar to a bank loan that is secured against the value of the car, as ownership of the vehicle is assumed once the repayments have been completed.

How hire purchase works

A deposit payment is agreed – typically 10% of the monthly payment – and repayments will be calculated based on this figure, the value of the vehicle, and the length of the repayment term. Once all the repayments have been completed, you will become the legal owner of the vehicle.

Why choose hire purchase?

  • There’s no contractual mileage restrictions or charges for damage
  • There’s no large upfront investment. The deposit is usually around 10% of the purchase price and the remaining cost is spread over fixed monthly instalments that will not increase – even if bank interest rates rise
  • The credit rating of the hirer is not necessarily an issue
  • You can save money by paying off your unpaid instalments early
  • You own the vehicle once your final instalment has been paid, compared to leasing (renting) the vehicle

Further considerations

  • The loan is secured against the vehicle. The vehicle can be repossessed if payments are not met
  • If you miss payments, this can negatively affect your credit rating
  • The finance company are the legal owners of the vehicle until the agreement is paid in full.
    Repayments will include interest charges, and the car will overall cost more than a cash purchase
  • The rate of interest will reflect the level of risk to the lender. Previous poor credit will represent higher risk and a higher rate will be charged

Personal contract purchase (PCP)

A personal contract purchase provides all the benefits associated with personal contract hire but gives you various options to choose from at the end of the contract. You can choose to pay a sum to purchase the vehicle known as a “balloon payment”, return the vehicle as you do with a contract hire agreement or terminate the agreement and take out a new PCP contract for a new vehicle.

How personal contract purchase works

A fixed monthly fee to lease the selected vehicle is paid over a set period of time, and you get a choice at the end of the agreement whether or not to meet a final payment to cover the car’s outstanding value. If this option is taken, the ownership of the vehicle will be transferred to the individual. However, the vehicle can also be returned at the end of the term.

Why choose personal contract purchase?

  • You have the option to take ownership of the vehicle at the end of the contract
  • The final purchase price will be agreed at the start of the arrangement so there are no nasty surprises
  • A low initial payment, normally 10% of the vehicle’s value
  • First year’s road tax is included
  • Lower monthly payments than you would have to meet with hire purchase, as you will only be covering the costs of the vehicle’s estimated depreciation – not it’s full value

Further considerations

  • You will have to decide at the end of the contract as to whether you wish to sell the vehicle, keep it or return it
  • If you damage the vehicle, you may incur a charge for any damage not covered in the fair wear and tear guide
  • Full comprehensive vehicle insurance is required
  • If you exceed the agreed mileage you will incur an extra charge

Lease purchase (LP)

Lease purchase can be a good option for people who would like to own a vehicle but do not necessarily have the money to buy one immediately. Once you’ve made a “balloon payment” (a large final payment) at the end of the contract, you take ownership of the vehicle. The monthly payments cover the difference between the value of the car at the start and end of the agreement.

How lease purchase works

When the lease purchase ends you have two options: either you can make the balloon payment and then take ownership of the vehicle, or you can choose to part exchange your vehicle – you make the balloon payment then lease a newer car.

Why choose lease purchase?

  • You’ll have lower monthly payments than if you opted to pay via a hire purchase agreement
  • You can choose to settle your agreement early by paying off any outstanding payments
  • You will own the vehicle at the end of the contract

Further considerations

  • The balloon payment must be paid for at the end of the contract before you can take ownership. This can be a relatively high cost
  • In some cases, the balloon payment can be higher than the residual value
  • You can’t add maintenance or any other value-added services to your contract

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