Car Finance Explained

Car finance may seem confusing so we have put together a simple guide that will help you to understand and decide which type of finance would be best suited for you. This is an important decision so you will need to know what options are available and that you 100% understand how they work.

​Personal Contract Purchase (PCP)

A Personal Contract Purchase (​PCP) usually lasts for 1-3 years. For this you will need to put down a deposit and it tends to have lower monthly payments than any other type of finance.

You then have the following three choices:

- Return the car to the dealer

- Keep the car

- Trade in the car against a replacement

The first option of returning the car costs you nothing, unless you have gone over the agreed mileage or have failed to return the car in a 'good' condition. In either of these cases there will be an excess to pay.

If you wish to keep the car it means that you will need to pay a 'balloon' payment. This amount is the car's guaranteed future value, or GFV, which is set at the start of the agreement.

The benefits of Personal Contract Purchase (PCP) are:

- Lower monthly repayments

- There are flexible options available at the end of the agreement

- You can confidently and accurately monitor your mileage

​Hire Purchase (HP)

A Hire Purchase (HP) contract usually lasts for 2-5 years. Again you will need to put down a deposit but it tends to have higher monthly payments. At the end of your contract you will own the vehicle - this would be the most straight forward options of finance available.

The car is owned by the HP company until you make the final payment - and any 'option to purchase' ownership transfer fees have been paid. Up to that point, the person making the payments has no legal right to sell the vehicle as it is not 'yours'.

The credit on a HP agreement is secured against the car, so it's like dealer finance in that the car can be seized in the event of a default. If you need to sell the car before the end of the agreement, you will have to pay the outstanding amount first - and an early settlement fee may apply.

The benefits of Hire Purchase (HP) are:

- You are the owner at the end of all payments

- Flexible payments can be made to pay off the debt before the agreed time

- A lower deposit is required (although you can put down as much as you wish)

- You can confidently and accurately monitor your mileage


- You must check your credit card file before considering car finance options.

- Make sure that you can afford the agreed monthly payments.

- You need to understand the type of car finance you are signing up to - make sure that any questions or queries you have are answered and understood before you go ahead with the contract.

We hope that you find this car finance guide very useful. If you still have any questions or would like more information on the prices available, we're on hand to help.