Quick guide to car finance

The average British motorist spends around £80 a week in owning and running a car – that’s £314 a month or £3,800 a year, according to a posting dated the 30th of January 2019 on the website Quora.

Of course, a large – if not the most sizeable – cost in owning and running a car is its price. Little wonder, therefore, that car finance is a critical issue for the vast majority of people. Currently, some 91% of all new cars purchased in the UK are with some form of finance, according to an article in Car magazine on the 21st of February 2019.

The following quick guide to car finance may help towards an understanding of the sources of that credit:

Hire purchase

  • the beauty of this traditional form of buying on credit is its simplicity;
  • typically, an initial deposit – of around 10% of the purchase price – is required;
  • equal monthly instalments follow this throughout the period of the hire purchase agreement – and, in some cases but not all, a final balloon payment is also required;
  • when all of the instalments have been paid ownership of the car passes to the buyer – but not before the instalments are complete and it is illegal to sell the vehicle before every payment has been made;

Lease purchase

  • lease purchase is a relatively common form of car finance for more expensive, prestige or luxury vehicles;
  • just as the term suggests, it is a conditional sale agreement which involves leasing the vehicle until the end of the lease period, when ownership transfers to the buyer;
  • “advance lease payments” serve as an initial deposit and are made at the beginning of the agreement and there is typically a final balloon payment at the end, called the “deferred sum”, which reflects the age, mileage and residual value of the vehicle;

Personal Contract Purchase (PCP)

  • in recent years, Personal Contract Purchase (PCP) has become probably the most common form of car finance – indeed, the Car Expert describes PCP agreements as “dominating” the consumer sales market;
  • it works in a very similar way to lease purchase in that an initial deposit is paid and followed by equal monthly lease or rental payments;
  • to complete the purchase, just as with lease purchase finance, a final balloon payment is made, and this is equivalent to the Guaranteed Minimum Future Value (GMFV) of the vehicle;
  • where PCPs differ from lease purchase, however, is that you may choose not to make the final balloon payment to buy the vehicle, but instead hand it back to the finance company with nothing more to pay.

Where to find your car finance

If you find a car you want to purchase, any dealer is likely to offer some form of car finance to help you buy it.

However, the deal on offer from the dealer may not be the most attractive car finance option available in the market, and you might end up paying a higher rate of interest on the credit. You are likely to be better served by consulting a specialist provider of car finance who can scour the market on your behalf and identify the most price-competitive deals available.