Types of Car Finance

What is a Hire Purchase agreement?

A Hire Purchase agreement is a type of credit agreement which allows you to spread the costs associated with financing your car over a fixed term. You will only own the car if you make the final payment and option to purchase fee. Traditional HP agreements do not include a lump sum balloon payment and payments tend to be in equal amounts throughout the term of the agreement. At the end, the buyer pays a small option to purchase fee (usually between £10-100) and ownership is transferred.

Hire Purchase Key Facts

  1. Can be used to finance both new and used cars
  2. Flexible deposit options – but some lenders have minimum deposit requirements where, for example, you have accepted a low interest APR deal
  3. Spreads cost of car in fixed equal monthly instalments
  4. You own the car once you have paid all instalments and paid the option to purchase fee
  5. You must obtain suitable insurance cover throughout the term of the agreement
  6. Your car could be repossessed if you don’t keep up with payments or breach another term of your agreement
  7. Unlike PCP, you are not limited to an annual mileage or other conditions (such as wear and tear). However, as the lender owns the car until you pay the balance in full and exercise your option to purchase, you are required to keep the vehicle in good repair and condition.

What is a Conditional Sale agreement?

A Conditional Sale agreement is a similar to a Hire Purchase agreement, the main difference being that you would not have to pay the option to purchase fee at the end of your agreement because you would automatically own the car outright after the final payment has been made.

Conditional Sale Key Facts

  1. Can be used to finance both new and used cars
  2. Spreads cost of car in fixed equal monthly instalments
  3. You own the car at the end of the agreement once the final repayment has been made
  4. You can make lump sum additional repayments during the contract without penalty
  5. You must obtain suitable insurance cover for the term of the agreement
  6. Your car could be repossessed if you default on your monthly payments or breach another term of your agreement
  7. You have the option to sell the car during the agreement term
  8. Unlike PCP, you are not limited to an annual mileage or other conditions (such as wear and tear). However, as the lender owns the car until you pay the balance in full, you are still required to keep the vehicle in good repair and condition

What is a PCP agreement?

A Personal Contract Purchase agreement is a type of hire purchase agreement which you can use to finance the purchase of your vehicle. This is a good option for someone who is looking to change their vehicle in a few years or at the end of the agreement because it allows more flexibility when deciding what to do at the end of your agreement.

PCP Key Facts

  1. Can be used to finance both new and used cars
  2. Most PCP agreements last between 24 and 48 months
  3. Flexible deposit options – but some lenders have minimum deposit requirements where, for example, you have accepted a low interest APR deal
  4. A good option if you need relatively low fixed monthly payments
  5. At the end of the agreement you have the option to: part exchange the car, hand the car back or pay the optional lump sum Guaranteed Future Value payment to own it
  6. You must have suitable insurance cover throughout the term of your agreement
  7. Your car can be repossessed if you do not keep up with your monthly payments or breach any other terms of your agreement
  8. If you decide not to keep the car at the end of your agreement, your mileage and the condition of the car will be assessed and financial penalties could apply