Look at the everyday items that you use and ask yourself, which items you paid for outright and which ones you have on a rolling contract. Did you buy your phone outright or did you get it through a contract with monthly payments? How about Netflix? Monthly right? The gym you try to attend? Monthly again. So many of the things we pay for in our lives these days are paid for on a monthly basis. So what about your car?
There are three different forms of car finance and each is fully adjustable in terms of length, deposit and how much you can afford to pay a month.
The three finance options available are Personal Contract Purchase, Hire Purchase and Lease Purchase. They all have the basic features in common with the main differences regarding the options you have when the finance agreement comes to an end.
Car Finance: The Basics
There are basic similarities that run through all finance and leasing agreements. Each agreement works by the customer paying a series of monthly payments for the duration of the agreement and the amount of those payments can be altered depending upon your circumstances.
Unlike with leasing, with a finance agreement, you are aiming to purchase the car. That means that you pay off the full value of the car over the space of the agreement, whether that solely be through monthly payments or with an additional balloon payment at the end.
The monthly payment amounts are determined by a variety of factors.
The deposit amount or no deposit at all
Length of the agreement: 24-60 months
Credit rating: Excellent to bad
Type of car you are interested in: New, nearly new & used
What deposit do you place?
When it comes to deciding which finance agreement is best for you, you have to think about certain factors first. At the beginning, you have the choice to pay an initial payment or deposit. The deposit usually has three options for you to choose from and usually equals a certain amount of monthly payments.
The options you have are as follows:
Three months worth of monthly payments
Six months worth of monthly payments
Nine months worth of monthly payments
If you are aiming for lower payments, it is best to pay a higher deposit. The higher the deposit you pay, the lower your monthly payments will be. Placing a deposit is not a requirement, but it is advantageous.
However, if you do not wish to pay a deposit, either through choice or necessity, there are still options available for you to get car finance. Hippo Leasing offers no deposit car finance fo those who do not wish to pay one. This will result in your monthly payments being higher because the deposit is spread across the period of your agreement evenly. This is suitable if you prefer to budget monthly.
Length can matter
One of the most important choices in regards to finance agreements is how long you want yours to be. As has been mentioned, most finance agreements last between 24-48 months, with some being up to 60 months. The most popular choice is 48 months long.
Length affects how much you pay monthly and how much interest will be placed on top. What this means is that the longer the agreement, the more the value of the car will spread across the period. That means that your monthly payments should be lower as a result.
However, the longer the agreement, the more interest you will pay and therefore the more money on top of the value of the car you will pay. So whilst it may be more affordable to pay for a longer agreement on a monthly basis, you will pay more money overall.
Let’s talk credit
Credit is the most important factor when it comes to acquiring car finance. Your credit rating can be the key to being accepted or rejected for car finance. If you have fair to excellent credit, you are likely to be accepted. The better the credit, the lower your interest rates will be and the less you will have to pay overall.
However, if you have poor or bad credit, there is a possibility you will be rejected for a normal car finance agreement. However, having poor or bad credit does not stop you being able to get car finance.
There are bad credit car finance options available for those with poor or bad credit. These options usually have higher interest rates on them, meaning you will have to pay more overall. The reason for the higher interest is that because of your credit history, it is riskier to finance your car, however, that doesn’t mean you can’t get car finance.
Choose your car wisely
The type of car you choose also affects the functions of the finance agreement. You have a choice between new cars and used cars. We would all love a new car. They are fresh, up to date and all yours. Most new cars can be custom made for you, the driver, so you can choose the colour, the optional extras and more.
However, with car finance, you are paying to cover the value of the car. With new cars, the value is usually the full price, therefore the amount you pay for a new car on a finance deal is the highest for that vehicle. To balance that out, because the car is brand new, you will not have to worry about maintaining the car and will be inside manufacturer’s warranty.
With used and nearly new cars it is different. Depreciation has already affected these cars, since the moment they were first driven. With that in mind, the value of the cars will be significantly lower than a brand new car. Therefore, your finance agreement will be lower as a result. However, on the downside, especially with older used cars, the maintenance costs will be higher and you may be outside of manufacturer’s warranty as well.
Every aspect of car finance is a choice that you can make.
Which finance option do you want?
As mentioned above, there are three forms of car finance. You have the choice between Hire Purchase, Personal Contract Purchase and Lease Purchase. You have to choose which one best suits your requirements.
Personal Contract Purchase
A Personal Contract Purchase agreement is the most popular finance option when it comes to getting a car. It is down to the fact that whilst it is a finance option, it straddles the line between finance and leasing perfectly. This offers the most flexibility in terms of options when it comes to an end.
As has already been described, PCP options work mostly the same as HP agreements. You can choose to pay a deposit followed by a series of monthly payments. However, there is a major difference between them. At the beginning of your PCP agreement, your finance company will calculate how much depreciation the car will suffer over the period of the agreement and calculate a Guaranteed Minimum Future Value (GMFV),also known as a balloon payment.
This balloon payment is calculated by taking into account a number of miles you aim to do when you decide upon your annual mileage allowance. The more miles you do, the more your car will depreciate, which will increase your monthly payments, but may lower your balloon payment.
When your agreement comes to an end, you have the choice of paying off that final payment and taking full ownership of the vehicle or you can take the second option. Hand the car back. This is where PCP straddles that line between finance and leasing. You can pay off the balloon payment or you can hand the car back.
By not paying off the entire value of the car over the finance period, the monthly payments are significantly less than a HP agreement.That is something worth considering in terms of your financial situation.
Hire Purchase is the purest form of car finance. It is also inflexible when it comes to an end. It is for those who are sure they want to own the car they have chosen and can afford their monthly payments.
Hire Purchase works by you maybe placing a deposit and paying a series of monthly payments. The entire value of the car is paid off over the period of the agreement through those payments. There is no final payment. When it ends, you have full ownership of the vehicle.
This option has the highest monthly payments, but that is it. There is no balloon payment. There is not necessarily a deposit. There are only those payments on a monthly basis. If that is what tempts you, the HP finance is the option for you and your car.
Lease Purchase finance agreements stand in the middle of HP and PCP deals. Lease Purchase agreements work by you paying monthly amounts and at the end paying a balloon payment, similar to a PCP agreement.
With PCP, you have the choice of not paying the balloon payment and handing the car back. With LP you don’t have that choice. You must pay the balloon payment at the end to take ownership of the vehicle.
This option is great for those of you who want lower monthly payments and know you will be able to pay off the balloon payment when the time comes.
Which do you choose?
The choice between finance options is entirely down to your requirements and what you can afford. If you know you want to own your chosen car then maybe car finance is the best option to go for.
If you know the car you want and which finance deal you are interested in, get in touch. Our dedicated team will work with you to get the best car finance deal most suitable to your needs.