Understanding your finance agreement
February 22, 2017 at 2:56 PM
Finance agreements are difficult to understand, here are some keys to read through them.
There are several methods that you can use when purchasing a new car. After a personal loan, which remains the most popular way to finance a new car, there are two main finance options that many people choose from the dealer they are buying from. These are Hire Purchase (HP) and Personal Contract Purchase (PCP). Both methods can be a great way of purchasing a new car. In this short article, we will consider both of these methods and help you to understand your finance agreement for your new purchase.
This is the simplest method of financing your car with a personal loan. Hire purchase is usually available from the dealer that you are buying from. It is also possible to buy a car using a hire purchase product from a third party. For example, some high street banks offer a hire purchase deal for buying a new car if you bank with them.
Hire purchase usually requires you to initially pay a deposit, which is normally around 10% of the purchase price, and then pay agreed, fixed monthly instalments until the total price of the car is paid for. This is often between 3 and 5 years. The finance company will own the car until the hire purchase loan is completely paid off. Once you have finished paying the agreed number of instalments, there will be nothing else to pay. During the time you are paying off the hire purchase deal, you are not limited by how many miles that you can do in the car. The important thing to watch out for with hire purchase deals is the APR. This is the interest on the loan. A good deal will offer you an APR of between 4 & 7 percent. Some dealerships will have higher APR's which are often higher on used cars than new cars. This is an important point to consider.
Personal Contract Purchase
Personal Contract Purchase is used in around 25% of new car deals. This is a modified hire purchase deal. You typically pay a deposit, agree on a term over which to pay fixed monthly payments, as well as one optional final payment. This optional final payment is also known as a guaranteed future value. This amount is the agreed amount of money that the car will be worth at the end of paying the fixed monthly instalments, but before this optional final payment is made. You typically have a few options when it comes to paying this optional final payment. You could:
- Pay the payment in full from your savings, you will then own the car.
- Finance this payment using a number of options and keep the car.
- Return the car to the finance company with nothing more to pay.
- Part exchange the car, guaranteeing that the car is worth at least this value.
The guaranteed future value is only guaranteed, however, if the terms of the finance agreement are kept. This means that you will have to stipulate how many miles you typically do in a year, and do not go over these miles to ensure this value is maintained. You may also need to have the car serviced by a franchised dealership in order to maintain its value.
The Personal Contract Purchase has the advantage of allowing yo to drive a nicer car than you could typically afford to if you had to pay the optional payment up front. Under the terms of any hire purchase agreement, including a PCP, one you have paid half the total amount owed you are allowed to give the vehicle back to the finance company and walk away from the deal. This is a really important point to remember.