What is Car Purchase Finance?

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There are a number of finance options for customers to obtain their next new or used car.

Hire Purchase (HP)

In HP, the lender hires a vehicle to the customer over an agreed term for a series of pre-agreed monthly payments and possibly some documentation fees (which may be included in the monthly payments) and a purchase option fee. Once all agreed sums have been paid to the lender, ownership of the vehicle passes to the customer.

There tends to be no mileage restriction under a Hire Purchase agreement, however a customer is urged to always read the terms and conditions of all financial agreements carefully in order to make sure that no other restrictions apply. For example, some lenders may not allow the vehicle to be taken abroad on holiday without their prior knowledge and consent.

“Balloon payments” can be offered on Hire Purchase agreements. A balloon payment is a pre-agreed amount (normally a % of the vehicle’s future value) that the customer can defer but must pay in order to gain full ownership of the vehicle.

Conditional Sale

This is very similar to Hire Purchase, but here the customer agrees to purchase the vehicle whereas with an HP agreement the customer has the option to purchase the vehicle at the end of the agreement.

As there is no hire element to the agreement, the customer will simply have full ownership at the end of the agreement. Like HP there are often no mileage restrictions to a Conditional Sale Agreement and Balloon Payments can also be factored into the agreement in order to defer some of the repayment and thereby keep the monthly rentals lower. Customers must be aware that any balloon payment forms part of their agreement to purchase the vehicle. If the balloon payment cannot be paid then their vehicle will be at risk and their credit profile may also be adversely affected.

Personal Contract Purchase (PCP)

Very similar to Hire Purchase, however a Balloon payment is always factored in when taking out a PCP agreement and, unlike HP, it does not have to be paid at the end if the customer chooses to hand the car back to the lender. Unlike the balloon on a Hire Purchase, the lender or the vehicle’s manufacturer will guarantee the future value of the vehicle being purchased and set the balloon payment as a % of this amount.

Customers will normally be expected to pay a deposit and the loan will be offered over a fixed period. PCP terms tend to range from between 2 to 3 years.

If a customer wishes to keep the vehicle, they can settle the agreement at any time paying the outstanding balance as well as the Balloon/Agreed Future Value. If at the end of the term the customer does not wish to keep the vehicle and they have not exceeded any mileage restrictions agreed at the beginning of the loan, and have kept the vehicle in a fair and reasonable condition, then they may simply hand the vehicle back.. If however any mileage restriction has been exceeded or the vehicle condition is deemed to be poor then some additional charges may be applied.

Contract Hire

Allows customers to use a vehicle for an agreed period of time. At the end of the agreement the customer will not retain ownership or possession of the vehicle. The customer is simply renting the vehicle for an agreed period and monthly payment. A mileage restriction will likely be imposed applicable throughout the term of the hire agreement. The customer must also agree to keep the vehicle in a good condition. At the end of the agreement the customer can hand the vehicle back. If however any mileage restrictions have been exceeded and/or any damage has occurred then additional fees may apply.

Warning: Late repayment can cause you serious money problems. For help, go to www.moneyadviceservice.org.uk

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