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Deciding how to finance your car is an important decision which many of us are increasingly making.
But how much do you know about it?
This guide will talk you through three particular types of finance that are standard within the industry. Leasing or Personal Contract Hire as it's often called, PCP which stands for Personal Contract Purchase and HP which stands for Hire Purchase.
Personal Contract Hire (PCH) is a type of long-term rental that will suit you if you’re not looking to buy the car at the end of your contract and won’t need to change the car before the end of the contract. For your leasing contract, you will select your expected annual mileage and contract length, as well as optional spec extras (cruise control, panoramic sunroof etc) and maintenance packages. You never own the vehicle. You lease the car for an agreed period of time by making fixed monthly payments. When the contract expires, you simply return your car.
It’s hassle free, as you can drive away a new car without worrying about how you'll re-sell it. Most leasing companies will offer an option with maintenance built in, eliminating unexpected repair bills. Your monthly payments on the car will be much lower than if you were buying it You will have access to new cars that you may not have been able to afford to buy.
Things to bear in mind
There’s no option to buy the car at the end. You will need to agree an annual mileage allowance at the beginning of your contract – there may be a mileage charge if you exceed this. Just like your mobile phone contract, you are tied in for the full duration of the agreement and there may be significant charges if you need to change or stop the contract.
Like other types of finance such as leasing or loans, PCP allows drivers to spread the payments for a vehicle over a long period, typically two or three years. PCP is a bit like hire purchase, but there are some important differences. You pay a deposit on the car you want and make monthly repayments until the end of the term. When the term ends, you then have a choice: you can make a lump sum payment – known as a balloon payment – in order to purchase the vehicle outright. Alternatively, you can use any equity they have in the deal – if the car has maintained more of its value than expected – to put down as a deposit on a new vehicle, via a new PCP deal.
If you decide not to buy the car, you can simply walk away when you've made all the payments.
Things to bear in mind
If you want to buy the car you will need to pay your final balloon payment (the Guaranteed Future Value). Similar to PCH, you will need to agree on a mileage allowance at the beginning of your contract and there may be excess mileage charges if you exceed this. You won’t be able to sell the car without settling the finance. You won’t own the car until you have made all of your repayments. You’ll need to keep the car properly insured, maintained and in your possession until the full value is paid off.
HP or Hire Purchase is similar to PCP as you put down a larger, smaller or no deposit which will, in turn, affect your monthly payments. The contract length is decided by yourself when being set up is typically two or three years. The main difference from PCP is that with HP you will automatically own the vehicle at the end of the contract. You can't give the vehicle back and walk away.
Things to bear in mind
Monthly payments may be higher than some other finance options, such as PCP, as you're paying off the full value of the car. You won’t be able to sell the car without settling the finance. You won’t own the car until you have made all of your repayments. You’ll need to keep the car properly insured, maintained and in your possession until the full value is paid off.
Leasing requires an initial rental which is paid two weeks after your vehicle is delivered to you
PCP often requires an upfront deposit
HP often requires an upfront deposit
With Leasing, you can terminate the contract early but you have to pay a substantial penalty fee decided by the funder
With PCP, you cannot terminate the contract early but you can get a final settlement price
With HP, you cannot terminate the contract early but you can get a final settlement price
Leasing has no risk of depreciation as you hand the vehicle back
PCP has no risk of depreciation should you choose to hand the vehicle back and a risk should you choose to keep it
HP has a risk of depreciation as you are the owner of the vehicle at the end of the contract
Leasing has excess wear and tear fines for damaged vehicles when they are handed back at the end of the contract
PCP has excess wear and tear fines for damaged vehicles when they are handed back at the end of the contract
HP has no excess wear and fear fines
Key Finance and Leasing Ltd, t/a KeyFleet are a credit broker and not a lender, we are authorised and regulated by the Financial Conduct Authority. Registered No : 714978
Registered in England & Wales with company number : 06530494 | Data Protection No : Z1262047 | VAT No : 928956956
Registered Office : KeyFleet, 12 Conference Centre Offices, Brockhall Village, Old Langho, Blackburn, Lancashire, BB6 8AY
Disclaimer: All vehicle images and descriptions are for illustration and reference purposes only, all vehicle leases are subject to credit approval and subject to change at any time. E&OE.
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