Car Finance

Other than a house, a car is most people’s biggest expense and is often too expensive to pay for in cash. However, saving up isn’t always viable if you need the car to get to work. Finance companies and car dealers offer a host of ways to borrow money, borrow a vehicle or both, but they can bring an overwhelming choice. Rather than take out a personal loan, many people use specialist car financing. You have several options, most of which involve the lender either owning the car or having the right to take possession until you’ve completed repayments.

Hire Purchase

You pay a deposit up front (often 10 per cent) and then borrow the rest of the money to repay over a fixed period, including interest charges. The big difference between this and an ordinary secured loan is that you don’t own the car until you’ve completed the repayment period and paid an administration fee at the end. The lender – who is usually the car dealer – retains ownership during the repayment period, meaning they can take possession if you don’t repay on time. Hire purchase may be more suitable if you have a good credit history (so can get reasonable interest rates) and definitely want to keep the car for many years.

Personal Contract Purchase

This works similarly to hire purchase but with more options. Again, the car remains the property of the lender during the repayment period, but the monthly payments are usually lower. At the end of the repayment period you have three options, one of which is to return the car: you don’t get any money back, but you don’t owe anything else, so in effect you’ve been renting it. Another option is to make a final payment to purchase the car outright. This takes into account the money you’ve already paid, the interest costs, and the current value of the car. This final payment is sometimes called a balloon payment. The third option is to pay the balloon payment but immediately return the vehicle and use its current value as a deposit to take out a personal contract purchase on a new car. Personal contract purchase may be more suitable if you want to keep costs low while keeping your long-term options open.

Personal Contract Hire

Finally, a model called personal contract hire means you never actually own the car at all. Instead, you sign up to lease the car for a set period in return for a monthly fee, giving the car back at the end. The fee will vary depending on both the value of the car and an annual mileage limit that you agree to follow. In some cases, you can have costs such as maintenance, repairs and vehicle excise duty (‘road tax’) built into the monthly fee. Personal contract hire may make most sense if you want to keep costs under control and view the monthly fee as ‘the cost of driving’ rather than a way to own a car.

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