Car Finance and Leasing can sometimes seem like a maze. That’s why we’re trying to make it easier for customers to find the information they need to make an informed decision.
Making the right choice will depend on whether you want to eventually own the vehicle or simply lease it for a few years. We’d recommend you consider your options carefully.
If you are sure you want to own the vehicle, a Personal Loan or Hire Purchase is a great option. If you want to regularly change then consider Personal Contract Purchase or Personal Contract Hire. And if you want to keep your options open the Personal Contract Purchase offers the most flexibility.
To easily compare these options check out our comparison table.
A Hire Purchase agreement is a form of loan where you place the deposit on your car and then pay the rest the remainder of the car off in monthly instalments. During this time you are hiring the vehicle. Once the monthly payments are complete you then own the vehicle.
A Personal Contract Purchase is a loan as well. However, your monthly payments are only designed to pay enough of the car off so that at the end of the agreement the remaining amount you owe is less than or equal to the how much the car is worth. This means at the end of the agreement you can
See a full comparison with our finance comparison table
Personal Contract Purchase (PCP) and Personal Contract Hire (PCH or lease) are often mixed up. Partly because they have similar names but also because they share a lot of similarities in how they function.
They both offer the option to pay monthly. The amount you pay monthly is also partly based on how much the car will be worth at the end of the agreement, which also means the mileage being driven affects the monthly price. In a PCP this amount is referred to as the Guaranteed Future Value.
One of the key differences is what happens at the end of the agreement. With a PCH, the only option you normally have is to return the vehicle and if you still need a vehicle you will have to replace it. With a PCP you have the option to return the vehicle as well but you also have other options. You have the option to own the vehicle if you pay, or refinance, the Guaranteed Future Value. Alternatively, you can part exchange the vehicle where the part exchange value will pay off the Guaranteed Future Value and potentially have some leftover to put towards your next car.
The other key difference is that PCP is a form of loan and PCH is a form of lease. This means there are a couple of technical differences between them but one of the main differences is what happens if you want to end the agreement early. With a PCH, if you want to end it early, you can still be liable for the remaining monthly payments even though the car is returned. With a PCP, as it’s a loan with the option to own you always have the option to pay off the outstanding balance and keep the car or sell as you wish. Alternatively, if you want to swap car the agreement can be ended so long as your car’s part exchange value is more than the amount owed (or you pay the difference, see Negative Equity below)
See a full comparison with our Finance Comparison Table
Both a Hire Purchase (HP) and Personal Loan are great options for if you want to own your car outright.
A Hire Purchase is a form of Loan that is linked to the car. You do not officially own the car until the entire loan is paid off.
A Personal Loan keeps the finance and the car purchase separate. Here you seek a personal loan from a bank or building society and, if approved, you are free to use the money as you wish. You can then buy a car as a cash buyer which means you own the car outright from the beginning. Because the loan and the car purchase are separate the loan is not secured against the car. This creates a bigger risk for the lender so you may be able to borrow less.
The Annual Percentage Rate (APR) of a finance agreement is designed to represent how much the finance will cost per year.
This includes interest which is the amount charged as a percentage of the amount currently owed but also includes other fees related to the finance such as the option to purchase fee or the approval fee.
As the APR represents all charges and fees for the credit, it is a way of comparing the cost of different finance choices.
Personal Contract Hire agreements do not have an APR rate because it is not a form of finance and is instead a lease. This is not to say they are cheaper than other alternatives but that as you are only leasing the vehicle, any fees or charges that need to be passed on are included in the agreement from the start and are not charges that accrue over time.
A Representative APR is the rate that the majority of customers will be offered (at least 51%).The representative APR varies from finance provider, the vehicle of interest and whether it is new or used.
This does not mean that we will be able to offer you this APR. We will always try to offer the best APR rate available to you but some customers may be subject to higher rates depending on their credit history.
In general, it is cheaper to buy your car with cash as this means you won’t be paying Interest and fees on what you borrow. However, this will require you to have all the money for your purchase in advance. Sometimes, there are 0% APR deals which means that Finance costs no more than buying cash.
When being quoted for Finance you will be given a finance quote which will compare the cash price to the total cost on finance.
The cost of Finance can often be partially or completely offset by many of the benefits of car finance including Deposit Contributions and free things being included. Plus when buying Cash, you don’t have the option to only pay the depreciation and return the car like you do with a PCP.
Car Finance offers a great way to spread the cost of your purchase across easy to handle monthly payments. Each type of Finance also has its own benefits. For example, Personal Contract Purchase allows you to split the payments so you only need to pay for the depreciation of the car and not the entire car and then you have the option to return it easily at the end.
There can be benefits that are only available with a car when you buy it on selected finance plans. These include:
Like any sort of borrowing, there is a risk with taking out Car Finance. However, there are several pieces of Legislation in place to make sure customers are protected. This includes making sure that every company has a treating customers fairly policy.
In addition, Johnsons Cars have an excellent customer reputation. We will always make sure our customer understands their options when it comes to finance and always be as transparent as possible. We let you know the risks and are always available for any questions.
Some risks can be mitigated with GAP Insurance, see below.
GAP Insurance is a product that we hope you will never need to use but provides a safety net if your car is involved in an accident.
At the start of your finance agreement it is very likely that your car is now worth less than what you owe (see Negative Equity below). This means that if you were involved in an accident and your car was written off, your insurance company will pay out the current value of the car and not what you owe on the car. This could leave you with remaining debt for a vehicle you can no longer use, making it difficult to get another vehicle. GAP Insurance covers the “gap” in what the insurance pay-out is and what you owe meaning you are not left out of pocket.
Johnsons Cars are a broker and not a lender. This means that we do not offer finance ourselves but sell it on behalf of a number of providers. This allows us to search through a variety of trusted lenders that suit you and your purchase. These lenders may pay us for introducing you to them.
The term Negative Equity is normally mentioned when trying to end the finance agreement early.
When you first buy a car the value of the car takes a sudden
drop because there is now an additional owner on the vehicles history, more
mileage and if you were to sell it privately you cannot offer the benefits and
security of a dealer. This will probably mean that the value of the car is less
than the amount you owe on your finance agreement. This difference is the
Negative Equity. Once part way through your agreement, it is likely that you’ve
paid enough of your car off that the amount you owe is less than the value of
the car. This difference is called positive equity.
When in Negative Equity, you won’t be able to end the agreement
to buy another vehicle unless you pay the difference. When in Positive Equity,
you can part exchange your car for another and the part exchange value of the
car will pay off the outstanding balance of your finance agreement and the
positive equity can be put towards your next car.
Voluntary Termination is a way to end your finance agreement early. Once you’ve paid 50% of the total payable amount (including the optional final payments if applicable), you have the legal right to voluntarily terminate (VT) your car finance agreement. Depending on the finance company there may be some terms and conditions around this, but providing you’ve kept up payments and paid a final agreed sum, you can give the car back and end your contract. So long as the car is in a reasonable condition there will be no charges for this.
Voluntary Termination should not affect your credit rating but it may affect the willingness of the company you Voluntarily Terminated with from lending with you again.