Car finance has gained popularity over the years among the cash strapped people who are unable to pay the entire amount upfront.
This article will walk you through the various car finance options so that you can choose the one that is best suited to you.
Hire Purchase (HP)
Under this option, you pay a certain amount as a deposit when you buy a car and pay off the remaining amount in instalments. The instalments are usually set for anywhere between 12 months to five years. You will have to pay a fixed rate of interest. The agreement ends when is entire payment is made. And you own the car once the agreement concludes.
Pros
- Once the agreement ends, you gain the full ownership of the car.
- This is the best option when you cannot pay the entire amount upfront.
- There is no need to estimate your mileage and pay a surcharge if you exceed it.
Cons
- Since you are paying off the entire value of the car, the instalments may be slightly higher.
- Even though you would not have the full ownership till the agreement comes to an end, you would be responsible for proper maintenance and insurance of the car
Personal Contract Hire (PCH)
Personal Contract Hire (PCH) is an option best suited for people who want to just enjoy driving the car but don’t want to buy it. You lease the car for a fixed time and fixed monthly payment and return it once the period is over.
Pros
- It is a hassle-free option.
- The monthly payments are lower as compared to if you were buying the car.
- Most companies have inbuilt maintenance cost in the option.
- You get to drive the cars that you might not be in a position to buy it.
Cons
- You have to agree on a yearly mileage allowance at the time of signing the contract.
- You might have to pay an excess charge if you exceed it.
- You do not own the car at the end of the contract period.
Personal Contract Purchase (PCP)
The main reason behind the popularity of this car finance option is that the monthly instalments that you pay, are actually towards the predictive deprecation. This is called the Guaranteed Future Value which is fixed at the start of your contract.
Pros
- You can use that equity towards a deposit on a new car in case your car is worth more than the GFV.
- You are free to not buy the car once you have made the full payment.
Cons
- You can’t own or sell the car without settling all your payments.
- You would need to maintain the car and insure it till the time all your payments are made.
Three car finance options explained and hopefully it will help you to decide which option is the most suitable for you.
