Let’s face it. The majority of us don’t have a spare twenty grand down the back of the sofa that we can use to buy a car outright. I know I definitely don’t!
If you’re like me and you’re not a millionaire, you’ll probably have to rely on a form of car finance to get your hands on a car. The good news is that there’s lots of different types of finance so you're bound to find one to suite your particular needs.
In this blog, I'll look at the basic types of finance, what they’re useful for and how they could help you.
What is car finance?
The simple answer is that car finance is basically what it says on the tin: finance that you use to buy or lease a car. You’ll agree terms with a finance company, pay an initial deposit (if you are leasing a car, this is called the initial rental) and then make fixed monthly payments until the agreement term comes to an end.
With some types of finance, like hire purchase and personal contract purchase, you’ll be given the opportunity to buy the car when the agreement comes to an end. With others, you’ll pay lower monthly payments but not be given the opportunity to buy the car.
Types of car finance
Car finance comes in a fair few flavours. Here are four of the main ones you’re likely to come across in the UK when you’re trying to get a car.
#1 — Hire Purchase
Okay, it might be slightly musty, dusty and old-fashioned, but hire purchase is still one of the UK’s most popular types of car finance.
It’s helped a lot of people own their own car over the years and it’s a passable option if you can’t stand the thought of not legally owning something.
It’s pretty simple as finance arrangements go. You receive a car and make monthly payments to a finance company for a fixed period of time. At the end of the period, you’ll be given the opportunity to become the legal owner of the car by paying a final transfer of ownership fee. Until you make the final payment, the finance company is the legal owner.
Read more: Hire Purchase (HP)
#2 — Personal Contract Purchase
Personal contract purchase (PCP) is similar to hire purchase in that you’ll pay regular monthly payments for a car but unlike hire purchase, those payments only cover part of the value of the car. At the end of your contract, you'll be given three choices.
One, return the car and walk away. Two, trade the car in (it it has positive equity) for another on PCP. Or three, you can buy the car. (Most people trade the car in for a new one and very few actually buy the car.)
If you decide to buy the car, you’ll have to pay a pretty hefty ‘balloon payment’. This can be pretty expensive if you’re not careful. For the ultimate car finance showdown, check out our blog post where we compare PCP, PCH and BCH!
Read more: Personal Contract Purchase (PCP)
#3 — Personal Contract Hire
Personal contract hire (also called PCH or car leasing) is pretty straightforward. You lease a car for a given period of time by paying monthly payments to a finance company and at the end of the agreement you’ll simply give it back to the company. The benefit of PCH is that these monthly repayments will often be lower than HP and PCP.
Read more: Personal Contract Hire (PCH)
#4 — Business Contract Hire
Business contract hire (BCH) is basically the same as personal contract hire. The key difference, at the risk of sounding slightly obvious, is that it's is designed for businesses instead of people. You can read more about how it differs from Personal Contract Hire here.
Read more: Business Contract Hire (BCH)
The car finance process
The process of getting car finance is fairly standard as arranging finance agreements goes. Not every process is exactly the same of course but there’s a few key milestones that are common to the majority of them. Here they are:
- Find a car
- Choose your type of finance
- Get approved for the finance
- Agree your terms and deposit
- Start your monthly repayments and get driving!
Repossession and car finance
Obviously, there’s a sting in the spoiler of car finance – its not like finance companies have a licence to print money after all.
One of the main catches of car finance is that if you don’t keep up to date on the payments, your car could be repossessed. How easily the finance company is able to do this depends on the particular type of finance agreement, your particular contract and how much you've repaid.
Hire purchase, for example, requires the company to seek a court order if you’ve already paid off over half of the car’s value. With others, the company can just repossess your car without needing to seek a court’s permission.