What are the different finance options? | AA Cars

The word ‘finance’ can seem intimidating. But when it comes to buying cars, it simply means different ways of paying for your new set of wheels.

If you’re thinking about buying a car, make sure you can afford it before going ahead. If you can’t buy it outright, you might be able to use a finance package instead.

Different types of finance

If you need car finance to help buy your car, there are 3 main plans you can choose from. You can go with Personal Contract Purchase (PCP), Hire Purchase (HP), or Contract Hire. You can also buy your car outright, with or without the help of a personal loan.

These all work differently, so make sure you pick a plan that works for you.

What you should do before deciding?

Before going ahead, you must be certain you can afford it. The last thing you want is to start paying a contract off before realising you can’t actually follow through with it and end up getting yourself in financial trouble.

If you’re getting a loan so you can own the car outright, make sure you can afford the repayments. You’ll also need a good enough credit score to take out enough money in your name.

Hire Purchase (HP)

With this form of finance, you’ll put down a deposit that’s a sizeable portion of the car’s worth – usually 10%. After that, you pay monthly instalments to pay the rest off, including interest for each payment. 

At the end of the agreement, once you’ve paid it off, you own the car. But be careful not to miss any payments, as the car could be seized from you. Also check the terms and conditions before you start the agreement, as you might not get all the extras you want, such as servicing.

Repayment terms usually last between 2 and 3 years. But this depends on what you can afford to pay at the time and how long you’re willing to pay for.

Personal Contract Purchase (PCP)

In many ways, this is similar to a hire purchase – but the monthly payments are smaller. And when the end of the contract arrives, you have a choice. You can either return it to the dealer, make a final ‘balloon payment’ to own the car – effectively a lump sum – or sell it privately to pay off the rest of the contract.

You’ll agree a set mileage limit at the start of the agreement, which you must stick to, and you need to keep the car in good condition to avoid any penalties. It can also cost more than a HP contract, especially if you keep the car at the end. 

It’s a handy payment plan if you like to change cars regularly, as you can choose a new model at the end of the agreement.

As with HP packages, terms usually last between 2 and 3 years. But you can have up to 5 years depending on how long you want the vehicle before you decide to keep or replace it. 

Personal Contract Hire (PCH)

Like PCP, you pay lower monthly costs than with HP agreements. But at the end of the contract, you don’t get to keep the car. The first payment is also quite large – normally 3 months-worth in a single chunk.

The costs depend on the type of car, the length of contract and mileage limit. This form of contract benefits people who want or need to change vehicles on a regular basis. It also helps people who don’t want to own a car – with drivers also able to give the car back before the contract is over for an additional fee.

Make sure you look out for the different services and conditions, such APR interest over the agreement and any additional fees. Cars must be returned within the mileage agreed and 

Buying it yourself

The downside of paying for a vehicle over monthly contracts is the additional interest. It can add hundreds or thousands to the overall prices of a vehicle.

You might be able to buy the car outright if you have enough money set aside beforehand. This could be from savings or from selling your old car. Or, you can apply for a loan to cover the costs instead.

This meansyou own the vehicle as soon as you pay for it, and you can focus on paying for the vehicle’s running costs. 


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