In the first of our series, we will run through the common finance packages you may consider when buying your new 14 plate car this March. Whilst some consumers take the decision to pay cash for their vehicles, the vast majority of new vehicles will be secured by one of a number of finance options. Each may offer advantages over the others under certain circumstances, and we are happy to share our opinion and experiences of each.
Types of vehicle finance agreements
Hire Purchase
This is the traditional method of finance provided by motor dealers. This is a type of finance that is tied to the vehicle, and you will have your termination and repossession rights on hire purchase that you may not have with other forms of finance.
Hire purchase agreements are fixed rate finance agreements that can be any period up to 60 months. They may involve a ‘credit facility fee’ and an ‘option to purchase fee’ that may be in addition to your first and last payments.
In most cases Hire Purchase agreements may have a higher interest rate than personal loans (see below) available through high street banks and direct lenders. However the 0% deals offered by motor dealers for certain deals are likely to be hire purchase in their style.
As hire purchase agreements are arranged through the motor dealer then they can be much more convenient than arranging a personal loan through your bank.
Advantages of hire purchase – convenience, more rights as a borrower, longer periods of agreements.
Disadvantages of hire purchase – higher interest rates, additional admin fees.
Personal Contract Purchase
This is a very popular option in motor dealers these days, and for the last decade or more. This type of agreement is modeled on a hire purchase agreement normally, so the termination rights and repossession rights will remain. However instead of paying even payments throughout the deal there is an addition of a deferred ‘balloon’ payment, often called the Guaranteed Future Value for the vehicle.
This means that you may pay fixed payments over a two, three or four year period, and have options at the end of that term:
You can buy the vehicle for the same GFV you have agreed as part of the finance package
You can part exchange the vehicle, using any extra part exchange value over the GFV for a deposit
You can hand the vehicle back with no further payments due
This provides cost effective monthly payments, and shorter buying cycles for consumers. This scheme also may attract discounted interest rates from the manufacturers as is statistically the best way for them to retain customers, as well as providing a source of used vehicles for dealer forecourts.
Advantages of PCP – low rate finance, shorter finance terms, affordable payments
Disadvantages of PCP – none really if the finance options are undertood
Personal loan
This is the type of finance that is offered by direct lenders and high street banks. These loans are not linked to the vehicle, and this means that the loan does not have to be settled if the vehicle is sold or ‘written off’ during the period of the loan.
High street banks traditionally offer lower rate interest than motor dealer hire purchase agreements, however you do not have the same rights in terms of repossession and termination. This means for example, that you cannot hand back the vehicle once half the total amount payable on the agreement has been reached.
A personal loan may be slightly less convenient than a finance agreement arranged through your motor dealer. You may have to go into your bank to arrange it, and you may have some paperwork to send off. However many lenders facilities allow for electronic signing these days, and this should be simple and straightforward.
Personal loans are unlikely to feature admin fees or credit facility fees.
Advantages of personal loan – low rate finance, do not have to pay off if you sell the vehicle
Disadvantages of personal loan – not the same borrower rights as hire purchase
Contract Hire Lease
This style of finance has long been popular with businesses in the UK, however we can now see more and more private individuals looking at this form of rental to secure the vehicle. This is quite different from any of the other types of finance discussed because of one particular reason, you have no option to buy the vehicle as part of the agreement.
Contract Hire is basically a long term rental arrangement with a leasing company. The customer simply pays a single monthly rental on the vehicle, and will hand it back at the end of a fixed term.
These have long been popular with businesses for tax reasons. However more and more private individuals are looking to a contract hire lease as a viable alternative to PCP because of low monthly rentals available through leasing companies. These leasing firms buy bulk volumes of vehicles, and use huge discounts to provide low monthly rentals for end users.
Advantages of Contract Hire lease – low monthly rentals, no depreciation to worry about
Disadvantages of Contract Hire lease – no option to purchase, vehicle is never an ‘asset’, VAT is not recoverable for private individuals
There are other types of finance agreement that you could consider also; lease hire, lease purchase, motor loan and more. These will usually be a variation on the styles described above.
Which type of finance agreement to choose?
With all the different types of vehicle finance available for your new 14 plate vehicle, the decision of which route to take can be a little confusing. In many cases the differences could be so minor that it will simply come down to a personal choice for your circumstances.
If the interest rate is crucial to you then either a 0% motor dealer offer, or a low rate personal loan may be the best option for your. If the monthly payment is lower, then a contract hire lease may be the best way to go.
It is important for you to take a look at all your car finance options carefully. Whatever choice you make we hope this has helped in your homework for your new vehicle this March.