Have you ever looked at the finance options available to you but was unsure about the differences? Here we’ve put together answers for the most common questions that we get asked about the three main types of finance options. Hopefully, this guide will point you in the right direction to decide which is best for you.
Buying a new vehicle can be an exciting time, whether it’s a brand new sports car or a motorhome for those summer getaways. Choosing the right type of finance for your vehicle can be tricky. As with any larger purchase, it is important to ensure you choose the right payment solution.
So what is the difference between them all?
We’ll explain each finance option in an easy-to-understand comprehensive guide including the benefits and the important considerations of Lease Purchase (LP), Hire Purchase (HP) and Personal Contract Purchase (PCP).
If your end goal is to lease a vehicle for a set time period and you have no intention of purchasing it at the end, then Lease Purchase could be the best option for you. With this contract type, you will essentially lease the car for a fixed period of time, paying off monthly installments. Once your contract ends, the amount that you have not yet paid off is deferred to a final lump sum (balloon payment) in which, on payment, you will be able to own the vehicle in full.
A Hire Purchase Finance contract works in a similar way to Lease Purchase, however the key difference here is the end goal; you will be paying towards owning the car outright. With this type of finance, there are two elements which you will need to pay. Firstly an initial deposit is usually agreed. Secondly, there will be monthly installments which eventually add up to the full value of the car or vehicle.
With a PCP finance agreement, you will usually pay a deposit and have to make monthly payments; very similar to a Lease Purchase contract. The key difference between PCP compared to the other two finance options above is that, instead of paying off the value of the car, you will be contributing towards the depreciation of the value. Once your contract ends, you can simply return the car and there are no more fees to pay. However, there is the option of purchasing the car by paying the final balloon payment.
So how does this work?
At the beginning of a PCP finance contract, a Guaranteed Future Value (GFV) figure will be determined for the vehicle. This is where the provider will tell you what they expect the vehicle to be worth when the contract ends.
You will then pay off the difference between what the car is worth when you take out the contract initially and when the contract comes to an end. Interest is also added on top of this. This is then to be paid each month spread out over the period you have agreed for your contract (these are usually 3 or 4 years for PCP).
Once your contract is coming to an end, you can then either keep the car by paying a large balloon payment, give the car back and there will be nothing more to pay or part exchange the vehicle for a different one and pay your remaining balance.
So, there we have it. The three main types of finance solutions that people choose to take out on a vehicle or asset. Hopefully, this guide has helped you to decide which is best for you.
If you’re raring to get driving your new vehicle, you can use our online finance calculator for a quick, free quote. Alternatively, our expert team is always available to chat through how we compare deals from a select panel of lenders to get you the best price.