All About Car Finance

Financing your car on monthly payments, instead of paying the whole amount upfront, can be a way of spreading the cost of your car purchase, be it new or used.

The two most common forms of car finance are PCP (Personal Contract Purchase) and HP (Hire Purchase).
This page is packed with information on financing a car. Read on and explore!

Personal Contract Purchase (PCP)

Personal Contract Purchase (PCP) is one of the most popular ways to buy a new car. This means lower monthly payments for you, but you will need to pay a final payment at the end (the Guaranteed Future Value) if you want to keep the car.

In many instances, when buying a new car, many manufacturers offer finance deposit contributions to help. Sometimes you don’t even need a deposit.

PCP finance can be tailored to your needs – you can specify the term (normally 2 to 4 years) and your annual mileage.

How does PCP work?

At the start of your PCP contract, a Guaranteed Future Value (GFV) of the car you choose is set. This is the car's expected value when your contract ends.

This means that your monthly payment is the difference between what the car is worth now and what it will be worth at the end of your contract (the depreciation) plus interest, which is calculated on the full value of the vehicle. You'll pay this difference off in monthly instalments and at the end of the agreement you will need to pay a final payment if you choose.

Remember: you are still liable for the full amount of the vehicle if anything happens to the car or if you settle early.

At the end of the agreement you’ll have three options:

  1. Keep the car by paying the final balloon payment (the Guaranteed Future Value).
  2. Hand the car back - your finance company has already predicted the Guaranteed Future Value of the car, so handing the car back will settle the deal (subject to you not exceeding your mileage agreement and the car being in good condition).
  3. Part exchange for a new car.

Pros

  • Monthly payments with a PCP agreement are usually lower than if your car is financed by a Hire Purchase agreement.
  • If you decide not to buy the car, you can simply walk away when you've made all the payments.
  • You can drive away a new or used car every few years (dependent on the chosen term) without worrying about selling it on.
  • If your car is worth more than the Guaranteed Future Value then you can use that equity towards a deposit on a new car.

Things to bear in mind

  • If you want to buy the car you will need to pay your final balloon payment (the Guaranteed Future Value).
  • You will need to agree on a mileage term at the beginning of your agreement and there may be excess mileage charges if you exceed this.
  • You won’t be able to sell the car without settling the finance.
  • You won’t own the car until you have made all of your repayments.

Can I settle my PCP deal early?

You can normally settle your deal early, however the finance company will require you to pay off the difference between what your car is worth now, and what you still owe.You can always speak to our sales team about upgrading or changing early.

This video is made by ŠKODA and clearly explains how a PCP plan works. Take a look!

Hire Purchase (HP)

If you choose to pay for your car with a Hire Purchase agreement, you will normally pay a deposit and will pay off the entire value of the car with your monthly installments. When all the payments are made, the agreement ends and you own the car.

Pros

  • You’ll be able to drive away a car that you may not have managed to buy outright.
  • You won't need to estimate your mileage at the start of your Hire Purchase agreement, so you'll avoid excess mileage charges.
  • Once you’ve made your final monthly payment, including the option to purchase fee, you'll have full ownership of the car.

Things to bear in mind

  • Monthly payments may be higher than some other finance options, such as PCP, as you're paying off the full value of the car.
  • You won’t be able to sell the car without settling the finance.
  • You won’t own the car until you have made all of your repayments.

This video is made by Volkswagen Financial Services and clearly explains how an HP plan works. Take a look!

Personal Contract Hire (PCH) 

This is a way of leasing a vehicle without having to own it. At the end of the agreement you can hand back the car as long as you have serviced and maintained it in line with your agreement. This is a less common way of financing your car, but do ask the showroom for details.  Main things to think about are:

  • You lease and don't own the vehicle
  • The agreement is for a fixed period of time or 'term'
  • There is a fixed monthly cost
  • If the annual mileage allowance you agreed at the start of the term is exceeded, you will have to pay an excess mileage charge
  • You can have maintained or non-maintained agreements. That is, if you do or don't want to include the service and maintenance costs in the agreement
  • At the end of the term you can return the vehicle and can start another agreement on a different one
  • You need to maintain your vehicle in good condition otherwise you may incur charges at the end of the agreement
  • Road tax is usually included in the agreement

This video is made by Volkswagen Financial Services and clearly explains how a PCH plan works. Take a look!

Finally, here is one more video that may help explain dealership finance versus personal loans.

If you still have questions, please ask to speak to the Business Manager in any of our branches. Any of the Sales Executives will be able to help too. They are all trained, accredited and regulated by the Financial Conduct Authority.