What are my options with car finance? An expert breaks them down

PCP vs HP car finance: Key differences explained by a motoring editorSource: The Independent

Transcript

00:00Let's talk about PCPs. Now PCPs are probably the most common form of car finance right now with

00:06PCP standing for Personal Contract Purchase Plan. Now these make buying a car more affordable on a

00:13monthly basis. They do that by deferring a proportion of the loan until the end of the

00:18loan period. So you're not actually paying that amount, although you're paying interest on it,

00:23you're only paying a proportion of that amount. So your monthly payments are lower. Now at the end

00:28of the term you've got three options on a PCP. You will have a minimum guaranteed future value or

00:34balloon payment set. Now you can pay that and you can own the car. You can hand the car back and walk

00:40away or hopefully the MGFV or balloon payment will be set in a way that is slightly lower than the

00:45actual value of your car. So if you're a part exchanging and paying off the MGFV you'll have

00:49some equity to put towards your next PCP. That's what's clever about them. Of course with many PCPs

00:57and many finance deals you have a mileage limit you've got to stick to that as well and do bear

01:01in mind that you have to put a deposit down first. That might be quite hefty. There may be a deposit

01:06contribution from the manufacturer as well but it's confusing. You've got to make sure you understand

01:11all the terms. Follow our guide to help you. HP or higher purchase seems like a slightly more

01:16old-fashioned way of buying but it's still out there. Similar to a PCP but with no deferred amount.

01:22So quite simply you're putting a deposit down again that might be quite hefty and paying a monthly

01:27payment and at the end of that you own the car. The monthly payment is likely to be more than it is

01:31on a PCP and crucially the clue is in the name. It's higher purchase so in effect you're hiring the

01:37car until the final payment is made when you own the car outright. There are still personal loans

01:43available. They're available on the high street from your local bank. Do compare the amount of the

01:47APR, the interest rate because it can differ. You may even be able to get a personal loan

01:52through the dealership but stick with those APRs. Keep comparing them. Keep comparing what the

01:57payments are. In effect it turns you into a cash buyer because you may have arranged the finance

02:02elsewhere. Increasingly popular is what I do. I lease a car these days through personal leasing.

02:08You put a deposit down. You pay a monthly payment which can be quite low and then you just hand the

02:12car back at the end of the term. There's no option to own the car. Now again there are mileage limits

02:19and you have to play around with the deposits and the mileages to get the right leasing amount but

02:23there are some really good deals out there on leasing sites. So it's really worth checking comparing

02:28the cost of leasing with a PCP. If you don't want to own the car at the end of the period it might be

02:34the right choice for you. If you're a business user business leasing is exactly the same as personal

02:39leasing but there's a VAT saving. You'll often see the prices quoted pre-VAT and you might be able

02:45to claim that VAT back to make business leasing even more affordable. If you want to sell the car

02:51on finance talk to your finance company first. You'll have to pay off what's owed before you own

02:55the car. You may not have an option to own the car as well if it's on a lease for example but always

03:00talk to the finance company. Don't just think you can sell the car. You've always got to pay off that

03:04amount otherwise you could get into trouble. There's always the opportunity to haggle still.

03:09Yes a dealer is going to make a lot of money on finance possibly more so than they will on the

03:13car themselves. So there's always room to haggle. You don't ask you don't get even if it's a nice set

03:18of carpet mats for free. So the golden rule is don't sign anything until you're absolutely clear

03:24what you're getting into, what the payments are that you can afford the payments and what happens

03:29at the end of the term. Hopefully our guide on the independent will help you but remember

03:34you've got to know what you're doing before you sign on the dotted line.