You may have seen in the news recently how 2015 was a record year for car sales, both new and used. One reasons cited for this boom in sales was the fact that the economy is recovering and people are getting more confident about making larger purchases. Another was the fact that dealerships such as ourselves are offering more and more attractive finance packages, enabling a greater number of people to purchase their dream car.
The two most popular kinds of car finance are Hire Purchase (HP) and Personal Contract Purchase (PCP) both of which have their own advantages depending on the buyer’s circumstances. Here we explain the ins and outs of these two kinds of finance to help you make an informed decision before you buy.
HP – Hire Purchase
As well as being a delicious condiment to have with your Bury black pudding, HP is a kind of car finance known as hire purchase. If you buy a car through hire purchase, you effectively lease the car from the dealership through the finance provider. Technically, the finance company buys the car and agrees to let you drive it, whilst you pay for it in instalments over an agreed period of time. Once all the payments have been made, you take full ownership of the car.
An initial deposit is paid and then the monthly repayments are calculated by spreading the remaining value of the car over an agreed period of time. In most cases, interested is also added to the repayments. Depending on the APR (annual percentage rate) of the interest this is where Hire Purchase can end up being quite expensive in the long term. If you can find a dealership offering 0% interest on their car finance packages (like we often do), the HP can be extremely advantageous.
PCP – Personal Contract Purchase
PCP, or Personal Contract Purchase is different to Hire Purchase in the way that the monthly repayments are calculated.
Rather than spreading the value of the car across a fixed term, the dealership agrees the Guaranteed Future Value (GFV) of the car i.e. how much the car will be worth at the end of the contract. The difference between its current value and the depreciated value is then spread across the term.
At the end of the contract term the buyer then has three options:
1. Pay the GFV of the car in a lump sum (sometimes known as a balloon payment) and take full ownership of the car.
2. Give the car back to the dealership to settle the deal.
3. Part exchange the car and begin a new PCP contract.
The main advantage of the PCP is that the monthly repayments are usually much lower than on a HP deal. Many people on PCPs take the third option above, beginning a new contract rather than paying the balloon payment, which makes them ideal for people who like to change their car on a regular basis.
One thing to be aware of is that when the GFV of car is calculated, your estimated mileage is taken into consideration. As such, before the PCP is agreed you will be required to provide an estimate of your mileage you are likely to do over the agreed period. If you exceed this figure before the end of the agreed contract period you will be required to pay a fee for every mile you exceed the estimate by.
HP and PCP are the two most popular kinds of finance that we offer at cartime and each has their own benefits depending on the buyer’s preferences. Hopefully the information given above may have helped you make a more informed decisions, however if you have any questions don’t hesitate to contact us or pop into the showroom and speak to one of our sales team.