Vehicle Finance Options
If you’re thinking of getting a new vehicle, there are four main finance options typically available. To help de-mystify this often confusing area, we’ve summarised each finance type, explained what it is and if it might suit you, along with a list of the key pros and cons.
What is Car Leasing or PCH?
Personal car leasing or personal contract hire (PCH) is a long-term rental arrangement where you lease a car or van of your choice for an agreed period (usually between 2-5 years).
You make an initial payment or deposit followed by fixed, monthly payments. At the end of the lease you simply hand back the keys. With PCH you’re paying off the depreciation value for the vehicle.
Car Leasing could suit you… if you’re looking for a lower initial financial outlay, fixed monthly payments and are happy to hand back the car at the end of the lease.
- A smaller deposit/initial payment is usually required (versus e.g. Hire Purchase (HP) or Personal Loan (PL)
- Monthly payments are typically lower (versus e.g. HP, PL)
- Greater affordability means potential to drive a higher specification vehicle (compared with some other financial options available)
- Knowing your set monthly payments in advance can help you budget better
- Road tax is provided for the entire length of lease (with PCP, only the first 12 months is provided)
THINGS TO CONSIDER
- You don’t own the vehicle and there’s no option to buy at the end
- The annual mileage needs to be estimated at the start of the contract, exceeding this figure will incur charges
- Terminating the lease early may incur charges
- The vehicle must be maintained, any damage beyond Fair Wear and Tear* may incur penalties
* Please see our Fair Wear and Tear guidelines
What is Personal Contract Purchase or PCP?
Personal Contract Purchase or PCP is a long-term rental agreement. With PCP there are 3 options when the agreement comes to an end you can: 1) return the vehicle, 2) purchase the vehicle outright, or 3) use the vehicle as part exchange for a new vehicle.
With PCP you make an initial deposit followed by fixed, monthly payments. If at the end of the agreement you wish to purchase the vehicle outright you’d need to make a final ‘balloon’ payment covering the full remaining value of the car or van.
With PCP you’re paying off the depreciation amount for the vehicle, along with interest calculated on the vehicle’s total value. If you choose to purchase the vehicle at the end, you’ll also be paying the guaranteed future value (the GFV) of the vehicle (established at the start of the agreement).
PCH could suit you… if you want a lower initial financial outlay, known fixed monthly payments and the option to buy the car at the end.
- You have the option to purchase the vehicle at the end
- A much smaller deposit/initial payment is required compared with HP/personal loan and monthly payments are often also lower
- Knowing your set monthly payments can help you budget better (due to all in one fixed-cost motoring and low risk of large bills)*
- If at the end of the contract the vehicle is worth more than the GFV estimated at the start, the profit can be either kept or put towards a subsequent vehicle
* All in one fixed cost motoring refers to car leasing’s pre-set monthly instalments, all-inclusive manufacturer warranty, and road tax, plus maintenance options if taken
Things to Consider
- Road fund licence is only included for the first 12 months (with PCH it is provided for the full length of contract)
- You must pay interest on the entire value of the vehicle, even if you don’t opt to purchase it at the end
- If the option to buy is taken, the stated GFV amount set at the start of the agreement must be paid (this amount is non-negotiable)
- The car must be properly insured, maintained and in your possession until the full value of the vehicle is paid off (or the contract ends)
- Annual mileage needs to be estimated in advance and may incur charges if exceeded
- If you wish to settle early, the difference between what the vehicle is worth at that time and what is still outstanding must be paid (this could create negative equity, especially if the lease is terminated within the first 3 years)
What is Hire Purchase?
With a Hire Purchase (HP) arrangement, you’re purchasing a vehicle by making an initial payment or deposit, followed by on-going monthly payments that continue (usually for between 1 – 5 years) until the vehicle is paid for in full. At this point the contract ends and the vehicle is yours to keep.
With HP you are hiring a vehicle until the final payment is made, then you own it.
HP could suit you… if you want to own the vehicle but are willing to wait (for between 1 – 5 years) before you have full ownership.
- Once the final monthly payment is complete, you have ownership of the vehicle
- There is no need to estimate mileage
Things to Consider
- Repayments can be much higher than for car leasing (PCH) and PCP, as the full value of the vehicle is being re-paid, rather than the depreciation
- You won’t own the vehicle until all repayments have been made (this takes usually between 1-5 years)
- The vehicle must be correctly insured and maintained until the vehicle is fully paid off
- The finance company may repossess the vehicle without a court order, up until the point that the customer has paid off a third of the total amount payable on the vehicle
- You can’t sell the car or van without settling the finance in full
What is a Loan?
A personal or business loan is money borrowed from a lender (e.g. a bank or other finance company) that can be used to buy an item (such as a car or van) in full, or used to top up other funds available.
A Personal Loan could suit you… if you want to buy a vehicle and have complete ownership of it sooner rather than later.
- You’re usually free to sell the vehicle (but it’s important to check with the lender first)
- There may be flexibility around repayment of the loan (e.g. paying additional amounts or paying off the loan in full before the end payment date)
Things to Consider
- Repayments can be much higher than for car leasing (PCH) or PCP, as the vehicle’s full value is being re-paid, rather than simply the depreciation
- If you sell the vehicle or it is a write-off, the lender may make you or your business repay the loan at short notice