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Car finance explained

One of the most popular ways to purchase a new or used car is to buy it on finance. The Johnsons Cars team have decades of experience in providing vehicle finance and leasing in a trustworthy manner and can support you in finding a finance plan that makes sense.

The reason why car finance is so popular is that it allows you to split the purchase of your new or used car into easy to handle monthly payments. There are also several different finance options that can be personalised to you so you can find a package that suits your needs

What Types of Car Finance are there?

There are several types of car finance, including Personal Contract Purchase, Personal Contract Hire, Personal Loans and Hire Purchase. All of these offer their own unique benefits.


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Personal Contract Purchase (PCP)

A Personal Contract Purchase (PCP) is one of the most flexible finance options, giving you the option to own the car or hand it back at the end. At the start of the agreement, the finance company estimates how much the car will be worth at the end of the agreement and guarantees this value (so long as it remains in good condition). Your monthly payments then cover the difference between how much you buy the car for and the guaranteed future value. This means at the end of the agreement you have the option to: make a final payment*, often called the balloon payment, to take ownership of the vehicle; hand the vehicle back (charges may apply if the vehicle is not in a good condition or has exceeded excess mileage); part exchange it towards the purchase of your next vehicle.

A Personal Contract Purchase is often incorrectly referred to as a lease as it shares a lot of similarities however, it is a form of a loan and is generally more flexible than a lease.

How does PCP actually work?​

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The value of your chosen car is decided at the start of the agreement. You make a deposit, and part of the value is deferred until this ends. This is called the 'balloon payment', or the Guaranteed Minimum Future Value (GMFV).

When the PCP agreement begins, you will typically make a lower deposit than you would on other types of finance. This could be around ten percent of the vehicle's value. The GMFV also ensures that payments are reduced.

Personal Contract Purchase often runs for either 24 or 36 months. The monthly repayment amount covers part of the car's cost plus interest. Payments and the interest rate on the agreement are fixed, so you will always know the amount going out.​

​Benefits of PCP

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Personal Contract Purchase agreements are a popular third way of giving you some stake in the vehicle you drive (something not offered by Contract Hire packages) without incurring the generally higher initial costs or monthly repayments of a Hire Purchase arrangement.

A modest minimum deposit, as well as the deferment of part of your costs to the end of an agreement, ensures manageable initial and monthly costs. The three choices available to you – selling the car back to the dealer, using it in part-exchange of a new model, or buying it outright – also allow you to easily adapt to any number of changing personal circumstances over the course of the agreement.

What do I do at the end?

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At the end of the finance term, your options are:

  • Pay off the GMFV and own the car.
  • Return the vehicle with no more payments to make.
  • Part exchange for another car on finance using the remaining equity.

Should you decide to give the car back, it must be in good condition. Reasonable wear and tear is covered, with excessive damage potentially subject to fines. You may also be charged if you exceed the mileage limit which was set at the start of the agreement.

Can I settle my PCP agreement early?

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This may be possible, depending on your circumstances. Every finance provider will handle this differently. Always speak with a financial advisor if you are considering ending your contract early.

Hire Purchase (HP)

Possibly one of the simplest finance options to understand is a Hire Purchase, which is a great option if you want to own the car at the end of the finance agreement. You simply pay for your car in monthly instalments and during this period you are hiring the car. Once you have completed your last monthly payment*, then the ownership of the vehicle transfers to you.

How does Hire Purchase work?

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Agree a deposit amount, mileage limit and length of term with your finance provider. The typical deposit is ten percent of the car's value, and HP plans usually last for between 12 and 60 months. Both the initial payment and the term length will have an impact on the monthly payment amount.

Repayments are fixed, so you can anticipate them and manage your budget accordingly.

During the agreement, you do not have the right to sell or alter the vehicle. You are essentially hiring it for the length of the term. It does not belong to you until all payments have been made.

Benefits of Hire Purchase

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A straightforward and easily understandable type of financing, Hire Purchase packages are ideal for buyers confident that (a) they wish to own their car at the end of the agreement and for some time afterwards, and (b) that their personal and financial circumstances are unlikely to change in the near future, allowing them to keep up with the fixed repayments. Deposit levels also tend to be low.

What do I do at the end?

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An 'Option To Purchase' fee is payable if you want to own the vehicle. It is only at this point that you are considered the legal owner. This gives you the freedom to do as you wish with the car.

It is often possible to return the car after at least half of the repayments have been made. This is an option if you decide you would like to use another make and model instead.

Can I settle a HP agreement early?

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On Hire Purchase, you are likely to be able to make early repayments. This could make HP a more attractive option than other types of car finance. The complete amount owed will still need to be paid, even if you settle earlier than expected.

Personal Contract Hire (PCH)

A form of a car lease, Personal Contract Hire offers a simple solution to those looking for a new car and know that they will be looking to change car again after a set period of time. Very simply, you are renting the car for a chosen period of time with monthly payments. At the end of the PCH lease, the vehicle is returned and you are free to buy or lease another car. PCH is only available on new cars and there is not normally an option to buy at the end of the agreement.

How does PCH work?

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The finance amount, less the deposit, is borrowed on your behalf. At the outset, you also decide on a mileage limit. In effect, the deposit is equivalent to several months' rent on the car in advance. The lender then leases the vehicle to you, with regular monthly repayments to be made.

As you are only leasing, payments on PCH could be lower than on a Hire Purchase plan.​​

What do I do at the end?

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The car is returned at the end of the agreement – there is never an option to purchase. You also have no further obligations, and can simply hand the keys back to the dealer.

All vehicles must be returned in good condition, and within the mileage limit set out at the start of the term. Going over your limit could incur charges, and this is often calculated per mile. In addition, if there is significant damage to the car you may have to have this repaired yourself.

Once the plan is over, you can potentially take out another PCH agreement on a different make and model of car. This flexibility is ideal for longer leasing and to avoid the eventual depreciation every vehicle is subject to.

Benefits of Personal Contract Hire?

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Drivers who opt for a personal contract hire can dispense with many of the onerous bureaucratic obligations which come with more permanent arrangements, such as Hire Purchase or Personal Contract Purchase.

Such concerns as resale value or the expiration of warranties are non-existent with PCH, and all the usual costs of ownership (e.g. Vehicle Excise Duty) are absorbed into the agreed monthly repayments. The very low deposit and the flexibility of the rental agreement enable you to switch cars quickly, and to drive a more expensive car than you might otherwise be able to afford.

Can I settle a Personal Contract Hire agreement early?

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Your finance provider may agree to this. It is unlikely that paying early will save you money, as the full leasing amount will still be owed. If you are having trouble meeting the repayments, talking with the finance provider could result in beneficial adjustments to your agreement terms.


What is the difference between Car Finance options?

Below is a table comparing each type of finance. These are generalisation so if you want to check that these apply to the car you’re interested in,

Hire Purchase Personal Contract Purchase Personal Contract Hire

Available on New Cars

Yes

Yes

Yes

Available on Used Cars

Yes

Yes – Age limits may apply

No

Max Term

60 months

48 months

48 months

Maximum Deposit

None

30%

Equivalent to 12 months’ payments

Minimum Deposit

£0

£0

Equivalent to 1 months’ payment

Options at the end of agreement

Once all monthly payment are made you own the vehicle*

Pay Final Payment and own vehicle*

Refinance final payment to keep the vehicle

Return Vehicle without paying final payment (charges apply if exceeded mileage limitation or vehicle is not in good condition)

Part Exchange Vehicle toward next purchase

Return the vehicle

Mileage Limitations

None

Up to 30,000 per year

Lower Mileage means lower monthly payment

Up to 30,000 per year

Lower Mileage means lower monthly payment