Car Finance UK it has become big business. A huge number of new and used car buyers in the UK are making their vehicle purchase to find car finance. It might be in the form of a bank loan, finance from the dealership, leasing, credit card, the trusty ‘Bank of Mum & Dad’, or myriad other forms of finance, but relatively few people actually buy a car with their own cash anymore.
A generation ago, a private car buyer with, say, £8,000 cash to spend would usually have bought a car up to the value of £8,000. Today, that same £8,000 is more likely to be used as a deposit on a car which could be worth many tens of thousands, followed by up to five years of monthly payments.
With various manufacturers and dealers claiming that anywhere between 40% and 87% of car purchases are today being made on auto finance the UK. It is not surprising that there are lots of people jumping on the car finance bandwagon. To profit from buyers’ desires to have the newest, flashiest car finance UK no deposit within their monthly cash flow limits.
Advantages of Car Finance UK
The appeal of financing a car is very straightforward; you can buy a car that costs a lot more than you can afford up-front, but can (hopefully) manage in small monthly chunks of cash over a period of time. The problem with car finance is that many buyers don’t realize that they usually end up paying far more than the face value of the car. And they don’t read the fine print of car finance loans UK agreements to understand the implications of what they’re signing up for.
What you must be wary of. However, are the full implications of cheapest car finance offers – not just when you buy the car, but over the full term of the finance and even afterwards. The industry is heavily regulated in the UK. But a regulator can’t make you read documents carefully or force you to make prudent car finance decisions.
Financing through the dealership
For many people, financing the car through the dealership where you are buying the car is very convenient. There are also often national offers and programs which can make financing the car through the dealer an attractive option.
This blog will focus on the two main types of car finance offered by car dealers for private car buyers: the Hire Purchase (HP) and the Personal Contract Purchase (PCP), with a brief mention of a third, the Lease Purchase (LP). Leasing contracts will be discussed in another blog coming soon.
What is a Hire Purchase?
An HP is quite like a mortgage on your house; you pay a deposit up-front and then pay the rest off over an agreed period (usually 18-60 months). Once you have made your final payment, the car is officially yours. This is the way that car finance has operated for many years. But is now starting to lose favour against the PCP option below.
There are several benefits to a Hire Purchase. It is simple to understand (deposit plus a number of fixed monthly payments). And the buyer can choose the deposit and the term (number of payments) to suit their needs. You can choose a term of up to five years (60 months), which is longer than most other finance options.
You can usually cancel the agreement at any time if your circumstances change without massive penalties. Usually, you will end up paying less in total with an HP than a PCP if you plan to keep the car after the finance is paid off.
What is a Personal Contract Purchase?
A PCP is often given other names by manufacturer finance companies (eg – BMW Select, Volkswagen Solutions, Toyota Access, etc.). And is very popular but more complicated than an HP. Most new car finance offers advertised these days are PCPs. And usually, a dealer will try and push you towards a PCP over an HP because it is more likely to be better for them.
Like the HP above, you pay a deposit and have monthly payments over a term. However, the monthly payments are lower. And or the term is shorter (usually a max. of 48 months) because you are not paying off the whole car. At the end of the term, there is still a large chunk of the finance unpaid. This is usually called a GMFV (Guaranteed Minimum Future Value).
The car finance company guarantees that, within certain conditions. The car will be worth at least as much as the remaining finance owed. This gives you three options:
1) Give the car back. You won’t get any money back, but you won’t have to pay out the remainder. This means that you have effectively been renting the car for the whole time.
2) Payout the remaining amount owed (the GMFV) and keep the car. Given that this amount could be many thousands of pounds. It is not usually a viable option for most people (which is why they were financing the car in the first place), which usually leads to…
3) Part-exchange the car for a new (or newer) one. The dealer will assess your car’s value and take care of the finance payout. If your car is worth more than the GMFV, you can use the difference (equity) as a deposit on your next car.
The PCP is best suited for people who want a new or near-new car and fully intend to change it at the end of the agreement (or possibly even sooner). For a private buyer, it usually works out cheaper than a lease or contract hire finance product. It is also good for buyers who want a more expensive car with a lower cashflow than is usually possible with an HP.
What is a Lease Purchase?
An LP is a bit of a hybrid between an HP and a PCP. You have a deposit and low monthly payments like a PCP, with a large final payment at the end of the agreement. This means that if your car is worth less than the amount owing and you want to sell/part-exchange it. You would have to pay out any difference before even thinking about paying a deposit on your next car.
Read the fine print
What is absolutely essential for anyone buying a car on finance is to read the contract. And considers it carefully before signing anything. Plenty of people make the mistake of buying a car on finance. And then end up being unable to make their monthly payments. As part of purchasing a car on finance. You should consider and discuss all of the various finance options available.
Originally from Australia, they have had a passion for cars and the automotive industry for nearly thirty years. And have spent the last seven years working in the automotive retail industry, both in Australia and in London.
They have combined his extensive knowledge of all things car-related with his own experience of selling cars. And delivering high levels of customer satisfaction to bring a unique and personal car buying agency to London. They offer specific and tailored advice for anyone looking for a new or used car in London.