October 27, 2021 at 1:20 PM
Owning a car is something most people aspire to have to facilitate their movements with more ease. The first step to ownership is purchasing a motor vehicle that you can manage or one you adore. Purchasing a vehicle upfront may prove difficult to many people, but there are solutions towards ensuring you get your dream car without haemorrhaging your finances at one go.
Car finance is the way to go, and you will find multiple offers lined up so that you can buy the car you desire. Car financing is a tenet of asset financing whereby you spread the cost over a set period; once you pay the full costs, the car is yours to keep forever. During the period you’re financing the vehicle, you are responsible for the maintenance and upkeep of the motor vehicle.
This guide will shed some light on two types of car finance, and they are the most common types of car finance. These two types of car finance are:-
- PCP finance - Personal contract purchase.
- HP finance - Hire purchase.
PCP finance is a more complicated way of buying a vehicle; it entails using it until the contract ends. The preliminary features of PCP financing are as follows:-
- You have to pass a credit check.
- The agreement runs between three to five years.
- You have to pay a deposit upfront.
PCP deals consist of three main parts: the initial deposit, whereby the dealer or manufacturer can contribute, and the higher the deposit, the lower your monthly installments.
The second part focuses on monthly payments, which pay off the car’s predicted depreciation during the contracted period.
The final part is at the end of the contract you also have several features which are:
- Pay the resale value and keep it.
- Return the car.
- Use the resale value to buy a new car.
Pros of PCP financing
- PCP financing has low monthly payments.
- It has more flexible options.
- Guaranteed future value of the vehicle.
Cons of PCP financing
- It is very expensive to buy a car outright.
- You are allowed a limited monthly mileage.
- There are penalties for damage and excess mileage when you return the vehicle.
HP finance is another car finance plan that involves a relatively low initial deposit. The objective of using this financial plan is to own the vehicle at the end of the contract. You should know that the initial deposit is typically 5-10% or more of the vehicle’s value. The rest of the installments are paid monthly at an equal rate over a while.
Pros of hire purchase
- You pay a relatively low initial deposit.
- There are flexible payment terms so that you can fit in your monthly budget properly.
- HP finance has fixed interest rates for the term.
- You can return the vehicle once you have paid more than half of the installments, and you are not liable to pay for the rest of the term.
Cons of hire purchase
- You cannot sell or modify the car during the duration of your contract unless you get express permission.
- Monthly installments are higher than PCP payment terms.
- It can be an expensive way of owning a car due interest.
- You don’t own the car until you pay the final payment.
- The lender can repossess the vehicle if you have not paid a third of the amount payable.
Differences between PCP and HP financing
The main difference is that you can own the car after completing your payment under HP financing, but under PCP, you can opt to return the vehicle or make a balloon payment to own a car.
Hire purchase financing is a more expensive route to owning a car than PCP financing because the monthly installments end up being more expensive than the vehicle's value.
HP and PCP financing paint a picture of short-term and long-term engagements because the contract length of PCP financing is much shorter. HP financing depends on the initial deposit and the vehicle's value then your payment structure is established.
Owning a vehicle can be a struggle for most people, but you need to know before beginning this journey that you should go for a plan that suits you. You cannot go wrong if you ask for opinions from people who have gone through financial plans; just remember to drive safely and take care of your vehicle once you get into a financial plan.