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by Marsh Finance on Aug 19, 2024 9:32:41 AM
Are APRs, GMFVs, and mileage limits leaving you scratching your head? And what's the deal with balloon payments – are we celebrating something? 🎈
We get it. Car finance can seem like a maze of jargon that requires a degree to navigate. But don’t worry – we’re here to break it all down for you. Whether you're eyeing your dream car or just exploring your options, understanding the basics of Hire Purchase (HP) and Personal Contract Purchase (PCP) is crucial.
Let’s dive in!
The Basics Of Car Finance
Car finance is essentially a way to spread the cost of your vehicle over several monthly payments, typically over a period of one to five years. You might choose to pay an upfront deposit, or you can explore our no-deposit options for more flexibility.
But where do Hire Purchase and Personal Contract Purchase differ? It all comes down to what happens at the end of your agreement.
Hire Purchase (HP) 📜
With Hire Purchase, you're essentially hiring the car until your last payment. After that final payment, the car is all yours – no strings attached! Hence the name, hire (then) purchase!
- Payment Structure: You’ll make between 12 and 60 fixed monthly payments, covering the full value of the car. For example, if your car costs £10,000, you'll pay off that entire amount over the agreed period.
- Predictability: Your monthly payments remain consistent, usually unaffected by interest rate changes, giving you peace of mind.
End of the Road – What’s Next?
Once you’ve made your final payment, you officially own the car. You can keep it, sell it, or trade it in for a new one – the choice is yours!
The Trade-Offs
Hire Purchase is great for those who want to own their car at the end of the agreement.
However, if you enjoy switching cars frequently, this might not be the best option. You’re committed to the vehicle for the duration of the contract, and there may be fees if you want to end the agreement early.
Take a look here for more information.
Personal Contract Purchase (PCP) 📋
Personal Contract Purchase is all about flexibility; as the title says, it is a personal contract until you can purchase the car. This option usually spans 2 to 4 years and gives you a variety of choices when your agreement ends.
- Payment Structure: Unlike Hire Purchase, with PCP, you’re not financing the entire value of the car. For instance, if the car costs £10,000, you might finance just £5,000 over 48 months. This means lower monthly payments compared to HP.
Your Options at the End
At the end of your PCP agreement, you have several choices:
- Make a Balloon Payment: This means to pay the remaining balance to own the car outright. In our example, this would mean paying £5,000.
- Refinance: Extend your agreement by refinancing the remaining balance.
- Return the Car: Hand the car back with no further obligations.
- Trade It In: Use the car’s value towards a new one.
Things to Watch Out For
PCP offers lower monthly payments, but it comes with a few conditions. You’ll typically face mileage limits and guidelines on wear and tear. Exceeding these can result in additional charges, so it's something to keep in mind.
Have a look here for more details.
So, Which Should You Choose 🤔
Choose Hire Purchase if you want the certainty of owning your car outright at the end of the agreement and don’t mind committing to the same vehicle for several years.
Choose Personal Contract Purchase if you prefer lower monthly payments and like the idea of having options at the end of your agreement, whether that’s keeping the car, swapping it, or returning it.
Still unsure? No problem! Our friendly team is here to help you figure out which option is the best fit for you. Give us a call, and we’ll guide you through the process with no jargon, just straightforward advice.