The auto finance situation in the UK is a little confusing for people looking to buy a car. There are actually several ways to borrow to buy a vehicle – some are specifically for auto finance and others can be used for that purpose.
In this article, we cover a few of the different auto finance options.
Personal Contract Hire
While Personal Contract Hire (PCH) is considered as a way to finance a car purchase, it’s essentially like a lease agreement because while you get the full use of a new vehicle, you don’t own it per se.
The PCH is an agreement where the vehicle is provided to you in exchange for making the expected monthly payments over the full period. To drive a new vehicle, it’s one of the least expensive ways because the payments aren’t buying the car itself but allow the use of it. At the end of the period, you don’t own the car, van, caravan or another vehicle.
Some people like this arrangement because it’s a less expensive way to drive a new car. However, most people prefer to own their vehicle – or, at least, own it once they’ve made all the payments.
With Hire Purchase (HP), you own the vehicle. The agreement is to make set payments including interest over an agreed period. Technically, the finance company that lent the money for the vehicle still owns it until it’s been fully repaid. As such, they can take the vehicle back if you are not maintaining the payment schedule.
Due to the fact that you’re paying for the full cost of the vehicle, HP is more expensive than PCH where essentially, you’re only paying the depreciation during the ownership period. However, it’s popular because the buyer owns the vehicle once it’s been fully paid for.
Personal Contract Purchase
The Personal Contract Purchase (PCP) is currently the most popular option in the UK to buy a vehicle.
The car also isn’t owned until the last payment is made. The agreement is for set monthly payments with a final balloon payment, which is larger.
There are multiple options at the end of the period when all but the balloon payment has been made. You can buy the car with the balloon payment or not pay the balloon payment and decide not to own the vehicle. Also, the difference in the current market value of the vehicle and the balloon payment can be used as a deposit on a new vehicle instead.
Vehicle Loans and Personal Loans
Another option is to take a vehicle loan or a personal loan for the purpose of buying a car, van, motorhome or caravan. When taking this approach, using a credit broker like Auto Finance Online to source the best value loan offer is a good idea to reduce the cost of a loan. A broker can find loans for special purposes like buying a caravan, which is a bit more unusual than a regular car purchase.
There’s a surprising number of ways to borrow money to purchase a new vehicle. They each have their pros and cons. Taking a loan out is perhaps the simplest option rather than messing around with complicated agreements where it’s easy to get very confused.