Understanding your current and forthcoming life circumstances is the best way to make an educated choice when it comes to car finance.
Being equipped with information about your income and outgoings, now and in the future, is a great starting point.
All the car finance options available to you have pros and cons, but it pays to think about the future.
It’s important to consider any plans you might have to change to a job that comes with a longer commute, for example. Might you need to make more regular visits to parents who live hundreds of miles away?
Hire Purchase (HP)
Under HP you pay a deposit (typically 10%) and choose the length of your payment term, usually between one and five years. That sets your monthly payments, including interest, and once you’ve made your final payment (which may include an ‘option to purchase’) you own the car.
HP is a flexible option used by drivers who might need to accommodate unexpected mileage or expenses.
If you are not sure how much you will use the vehicle then HP can be an attractive option because you won’t face excess mileage costs. It can be ideal if you want to own the car at the end of the plan.
Personal Contract Purchase (PCP)
By deferring a proportion of the cost of the vehicle to be paid at the end of the contract, PCP offers monthly payments that are lower than HP.
You choose how much deposit you want to pay, calculate your annual mileage and decide on the length of the contract, before paying fixed monthly payments.
At the end of the contract you can hand the vehicle back, exchange it for a new one (subject to fair wear and tear) or take ownership of the vehicle by paying the outstanding balance.
If you want the thrill of owning a brand new car but want to keep your monthly costs low or may be looking to swap the car in future to meet changing family or personal needs, PCP may be for you. It is popular with professionals who are paid a car allowance and want a car that impresses.
It offers the reliability of a new vehicle, relatively low monthly payments and flexibility in terms of what you do with the car at the end of the plan, so it’s often chosen by first-time buyers.
Personal Contract Hire (PCH)
PCH involves paying a deposit (usually the rental cost for three months) followed by fixed monthly payments.
At the end of the contract you hand the car back. There is no option to buy the car after you have made the final payment. In effect, you're renting a car for two or three years with an agreed mileage limit of around 10,000 miles a year. Typically, the only extra costs are insurance and fuel.
PCH is perfect for anyone who does not want to own the car at the end of the contract, would like to change their car regularly so they are always driving the latest model, or wants to benefit from low monthly repayments.
But you’re paying off the depreciation in your monthly payments, so PCH is not a good option for drivers with a high annual mileage.
PCH often includes service and maintenance plans so it’s often seen as a convenient option for low-mileage drivers who want a hassle-free experience. It’s also a great way to change cars regularly.
Whatever your life stage, these will be key considerations in choosing finance choice:
- Your credit rating
- How much deposit you want to pay
- How much you will use the car
- How much you want to pay per month
- How long you want to keep your car