What finance options are available when buying from motor dealerships?

Hire purchase (HP) is one of the most common methods of funding a car purchase. It is exactly what it sounds like – a hire agreement which gives the customer the option of owning the car at the end of the term. These are normally fixed cost, meaning that the APR (Annual Percentage Rate) is set before the contract begins. The loan period is also fixed – typically three to four years – and the finance agreement is secured against the car being bought, which means that lenders can be flexible in the terms and conditions they offer.
Personal Contract Purchase (PCP) is a variation of a Hire Purchase agreement. The key difference is that the value of the car at the end of the contract is calculated at the start of the agreement. This is usually referred to as the Guaranteed Minimum Future Value (GMFV) and is based on a number of factors, including how old the car will be at the end of the agreement and how many miles it is expected to have covered. Deferring the GMFV to the end of the agreement means that your regular monthly payments are lower than those on a comparable HP agreement over the same term. A PCP agreement also gives you the flexibility to decide whether you would like to own the car outright at the end of the agreement by paying the deferred value (GMFV), or returning the car to the lender and entering into a new car finance agreement.
Lease Purchase is a form of conditional sale agreement, which means that the regular payments are similar to a lease/rental agreement but you will own the car at the end of the deal. You may be asked to make a number of monthly payments at the start of your agreement (referred to as ‘advance payments’ and the leasing equivalent of a deposit) and a further sum is usually deferred to the end of the deal – depending on the age and mileage of the car at the end of the agreement. The difference between a lease purchase and a PCP agreement is that the deferred sum (referred to as a Guaranteed Minimum Future Value (GMFV) in a PCP deal) must be paid on a lease purchase agreement. On a PCP, it’s optional.

For more information visit: www.financingyourcar.org.uk