Car Finance advice

There are lots of ways to purchase your new car. Below we explain the different ways to help you decide which could be the best for you. Once you have read this article we advise that you compare a number of lenders and their options before agreeing to any contract.

PCP explained

PCP is one of the most popular ways to purchase a cheap new car today, it allows customers to purchase a car of their choice at a very attractive fixed monthly finance payment, with the benefit of a low initial deposit outlay and a guaranteed minimum future value (GMFV) at the end of the agreement. PCP is particularly useful if you are a company car driver opting out of the company car scheme (Cash for Car), because you can use your company car allowance or mileage reclaims to fund your monthly PCP payments and avoid paying excessive company car taxes.

Personal Contract Purchase provides the benefits of driving a higher specification vehicle for a lower monthly payment. Unlike the traditional car purchase plan, this is achieved by deferring a percentage of the total cost of the vehicle until the end of the contract which is known as the GMFV, then at the end of the agreement the customer has three options:-

Option 1

If you want to keep the vehicle, you simply pay off the outstanding GMFV to the finance company.

Option 2

If you think the vehicle is worth less than the GMFV you can simply return it to the finance company. As long as the vehicle is in good condition and has not exceeded the agreed mileage, you have nothing more to pay. The finance company Guaranteed this future value and they will absorb the loss.

Option 3

Or you can part exchange the vehicle with a motor dealer for your next new vehicle. If the trade-in value is greater than the GMFV, this sum can be used towards a deposit on the new agreement. Alternatively, you can sell the vehicle privately and keep any profit over and above the GMFV.

Other info

At the beginning of the agreement, you decide on the total mileage for the contract period and if you decide to hand your vehicle back to the finance company and your mileage exceeds the agreed mileage, you simply pay a fixed amount for every extra mile. It is in your interest to minimize the vehicle's 'wear and tear' and not exceed the agreed mileage. When the agreement has finished, the vehicle may well be worth more than the GMFV, providing you with extra value. In simple terms 'normal wear and tear' means that for its age and mileage, the vehicle is in fair working order, condition and repair. A detailed guide will be provided to you by the finance company at the start of your agreement.

Hire Purchase explained

Buying a new car using Hire purchase finance is very similar to buying it through a bank loan, where you choose how much deposit to put forward or use your part exchange and make monthly repayments over an agreed timescale. And at the end of the finance agreement you have brought the car and it's yours.


Lease Purchase explained

Lease Purchase is structured in a similar way to Personal Contract Purchase (PCP).

The customer will normally benefit from a slightly lower finance rate with a Lease Purchase product as there is no guarantee offered at the end of the agreement, the deferred capital lump sum amount at the end of the agreement is known as the Residual Value (RV), and this has to be paid by the customer for outright ownership.

Deposits for Lease Purchase are flexible and are normally a minimum of 10% and a maximum of 50% of the total vehicle price, repayment periods are taken over 3 to 4 years typically.

The Residual Value (RV) (sometimes called the balloon payment) at the end of the agreement reduces the regular monthly payments accordingly. This makes vehicles that traditionally have a strong Residual Value (RV) (such as the new MINI) more suitable for this type of product as they make repayments far more affordable.

The Residual Values (RV) is calculated and set at the beginning of the agreement and although this is not payable until the end. At the end of the agreement, there are two options-

1. Pay off the residual value in cash or settlement by part-exchange

2. Some lenders will allow the residual value to be spread over a secondary period and be refinanced again.

Buying Outright explained

If you can afford to buy your car outright this is usually the best option as you are saving on interest payments. However if the dealer is offering 0% finance it may be worth taking the finance deal and putting your savings into a high interest account.

Getting a Car Loan explained

You do not have to get finance from a dealer or broker. Shop around and you could get better rates from a bank or other lender, particularly if you have had trouble getting credit in the past.