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Hire Purchase and Personal Contract Purchase loans for car finance.
CAR LOANS
Hire Purchase (HP)
This is a well established way of purchasing a new or used car, or for that matter, any item of substantial value such as a caravan. Although hire purchase is a traditional way of buying a car you should also look at Personal Contract Purchase.
For buyers of a new car, manufacturers' may have a 0% or interest free offer. This can be a good option but don't expect to get a discount on the purchase price as well. You can try, and if you succeed, very well done! Alternatively, you could obtain finance beforehand from an independant finance company and haggle over getting a big discount on the list price. This effectively puts you in the position of a cash buyer. The choice is yours; personally I don't like haggling or, more likely, I am pretty useless at it anyway.
You will be asked to put down a deposit of between 10 to 20% of the vehicle purchase price. Normally, if you have a car to part exchange, its value can be used in part or in full for the deposit. Otherwise you will need ready cash.
Normally a hire purchase loan is easy to set up as, in fact, it is really a secured loan: the finance company owns the car until you make the final payment. The loan can be arranged to have a repayment period anywhere between 1 to 5 years. Obviously the longer the repayment period the more interest you pay so it is better to go for the shortest period you can comfortably manage.
If you run a business, hire purchase also has its advantages. Firstly, the interest paid is allowable against taxable profits, and capital released can be used for another project where loans may be more difficult to obtain.
If there is a possibility of paying the loan off early you should be aware that there may be a penalty for doing this. Check the small print carefully.
Points to Remember
- The finance company owns the car until you make the final payment. If you do not keep up your payments the car will be repossessed and all instalments paid previously will be lost.
- You cannot sell the car unless, or until, the hire purchase loan is repaid in full.
- If interest rates are high when you take out the car loan, you will continue to repay at this rate even if rates subsequently fall. On the other hand if rates are low and then rise...aren't you lucky!
Personal Contract Purchase (PCP)
Personal Contract Purchase is becoming an increasingly popular way to buy a car and is an attractive variation of hire purchase.
You agree to lease a car for a set period, normally up to 4 years, for a fixed monthly charge. You have the option to make a guaranteed future value payment (balloon charge) to buy the car at the end of the agreement.
You will probably have to pay a deposit which can be anything up to the equivalent of six of the monthly payments. Like a hire purchase agreement, the interest rate is fixed so you have the advantage of accurate monthly budgeting.
The amount payable each month will depend on the cost of the vehicle chosen, the mileage that you will drive, and the estimated value of the vehicle at the end of the agreement. The last item mentioned is equivalent to the balloon payment although some companies also make an administration charge or "option to purchase fee" on top of that.
At the end of the scheme, instead of making a final payment, you can return the car to the dealer and its value can be used as a deposit towards a new one.
Points to Remember
- The monthly payments are reduced by the amount of the deposit paid and the guaranteed future value of the car and are therefore made more affordable.
- You do not own the car until the final balloon payment is made.
- You may also be able to include a maintenance and servicing option into the agreement.