What is car finance

Published: 29 March 2024

If you’ve ever explored finance options before then you’ve probably come across a lot of different terms; hire purchase (HP), Personal Contract Purchase (PCP), Personal Contract Hire, Lease Purchase, Finance Lease, Business Leasing...the list goes on and it can be confusing!

Here, we’ll give you a simple explanation of the two most popular options available, what the benefits are, limitations and what to look out for and what happens at the end.

Hire Purchase;

Hire Purchase or HP is one of the most popular forms of financing throughout the motoring world and is probably the simplest.

With HP you’ll typically need to offer a deposit of 10%, although zero deposit options are available, and the remainder of the vehicle’s cost will be spread evenly in monthly instalments across a period of your choosing, up to 5 years, and will be charged interest, just like any loan, across this period.

[HP image]

Once you have made all of the payments, you own the vehicle!

It’s that simple; choose your deposit, drive away your new car and make your monthly payments until it is paid off.

Can I settle early? Yes, you can settle a HP agreement early and you’ll normally receive a refund of interest depending on how early into the agreement you decide to settle.

Do I own the vehicle? During the agreement, the vehicle is owned by the finance company but once all of the payments have been made you own the vehicle.

Can I sell the vehicle during the agreement? No, as the finance company owns the vehicle you cannot sell the vehicle until it has been paid off in full. You can however pay off your finance early and sell it once the finance company have removed their ownership of the vehicle.

Can I part exchange my car during the agreement? Yes, most customers choose to replace their vehicle before the agreement comes to end for many different reasons. Your current finance agreement will be settled as part of any new finance agreement going live, so the dealership will do all the work for you.

What happens if I miss any payments? Most finance companies will try to work with you should you fall into financial difficulties but they have the right to repossess your vehicle if you fail to keep up any payments. Our advice; if you think you may experience any issues then get in touch with the finance company early on and discuss what options are available to you.

Personal Contract Purchase;

PCP has become an increasingly popular way to buy vehicles, especially new cars, as the monthly payments can be a lot lower than a personal loan or Hire Purchase.

PCP can be a great way of buying a new vehicle if you like to change vehicles on a regular basis as it is keep monthly payments down by deferring a portion of the vehicle’s price into a balloon payment, or larger final payment.

As with HP you’ll normally need to offer a deposit, although zero deposit options may be available and you’ll need to work out what your annual mileage will be. Once you’ve decided on your deposit, the remaining balance of the vehicle’s cost will be broken down into two parts; your monthly instalments and the GFV or Guaranteed Future Value.

[PCP image]

The GFV is an amount that the finance company will decide the vehicle is worth at the end of the term, based on your predicted mileage and fair wear and tear, if can also give you an indication of what your car will be worth in 3,4 or 5 years time. This amount represents the final payment you have to make at the end of the agreement if you wish to own the vehicle.

At the end of your agreement, you have 3 options;

· Pay the GFV or final payment and the car is yours!

· Part exchange your vehicle for a new one (you may need to contribute a higher deposit if the value of your vehicle has dropped)

· Give the vehicle back to the finance company and walk away!

Many customers choose PCP as it allows them to buy a newer or more expensive car with a much lower monthly payment or if they simply want to change their car every 2-4 years.

Here are some things to consider;

1. Be realistic about your annual mileage - because the GFV (final payment) is heavily affected by the predicted mileage on the car at the end of the agreement, if you go over this allowance then your car will be less than expected. This can mean that your part exchange may not cover the GFV or you can be charged by the finance company if you hand it back to them.

2. Look after the vehicle! The GFV is also based on fair wear and tear – you can expect the odd stone chip or minor scratch but any excessive damage will affect the cars value and you may be penalised.

Can I settle early? Yes, you can settle a PCP agreement early and you’ll normally receive a refund of interest depending on how early into the agreement you decide to settle.

Do I own the vehicle? During the agreement, the vehicle is owned by the finance company but once all of the monthly payments and final payment have been made you own the vehicle.

Before you sign up to any finance agreement you’ll be given the chance to review all of the contract information and ask any questions so make sure you are completely happy before you drive away.

At Norman Motors you won’t find any pushy sales tactics, hidden terms or conditions just honest advice and Peace of Mind motoring. If you have any questions about which finance route to take then pop in to either or Bournemouth or Poole showrooms, pick up the phone or drop us an email and we’ll be happy to help.

On our website you can watch our helpful finance videos [link] and even apply for finance in the comfort of your own home using our secure finance link.