Car finance is so confusing right? So many different options with varying pros and cons - it's hard to know where to start. Fear not, as Carfound have put together the complete guide to car finance.

What is Car Financing?

Car financing is the process of borrowing money to purchase a car. When you finance a car, you receive a loan from a lender to pay for the car, and then you make monthly payments over a set period of time to pay back the loan with interest.

Car financing is a popular option for buying a car in the UK, and it has become increasingly common over the past decade. According to the Finance & Leasing Association, which represents the UK's consumer credit industry, 91% of private new car purchases and 72% of private used car purchases in the UK were financed in some way in the twelve months to February 2022.

There are several factors driving the popularity of car financing, including the convenience of having a manageable monthly payment, the ability to drive a new car every few years, and the availability of competitive financing rates. Additionally, car financing can be a good option for people who don't have the cash to purchase a car outright, but want to spread the cost over time.

There are several types of car financing available in the UK

1. Personal Contract Purchase (PCP)
2. Hire Purchase (HP)
3. Personal Contract Hire (PCH)
4. Lease Purchase (LP)
5. Personal Loan

1. Personal Contract Purchase (PCP)

A personal contract purchase (PCP) is a type of car finance agreement that allows you to make lower monthly payments than traditional financing, with the option to buy the car at the end of the contract.

With a PCP agreement, you will usually pay a deposit and then make monthly payments over a set period, typically between two and four years. The monthly payments are based on the difference between the car's initial price and its estimated value at the end of the contract, which is also known as the Guaranteed Future Value (GFV). The monthly payments can vary depending on the term and mileage chosen at the start of the contract. At the end of the contract, you have several options:

1. Purchase the car by paying the GFV: If you choose to buy the car, you will need to pay the GFV in full, which is agreed at the start of the contract.

2. Return the car: If you choose not to buy the car, you can simply return it to the dealer, as long as the car is in good condition and has not exceeded the agreed mileage limit.

3. Part-exchange the car: You can also use the value of the car to part-exchange for a new car.

It's important to note that with a PCP agreement, you do not own the car until you have paid the GFV at the end of the contract. Also, keep in mind that there may be additional fees and charges associated with a PCP agreement, such as early termination fees, excess mileage charges, and wear and tear fees.

Pros and Cons of a PCP Agreement

PCP, or personal contract purchase, is a type of car finance agreement that has its own advantages and disadvantages. Here are some pros and cons of PCP to help you decide if it's the right option for you:

Pros of PCP:

1. Lower monthly payments: PCP agreements often have lower monthly payments than traditional car finance agreements because you are only paying for a portion of the car's value over the contract term.

2. Flexibility at the end of the contract: At the end of the contract, you have the option to purchase the car or return it to the dealer. This gives you flexibility to choose what to do with the car.

3. Guaranteed Future Value: The Guaranteed Future Value (GFV) helps to protect you from depreciation, which is the loss of value over time. You'll know what your car will be worth at the end of the contract, which gives you peace of mind.

4. New cars: PCP agreements often allow you to drive a new car with the latest technology and features that you may not be able to afford with traditional financing.

Cons of PCP:

1. Higher interest rates: The interest rates on PCP agreements can be higher than personal loans.

2. Mileage limits: PCP agreements often come with mileage limits, which can lead to excess mileage charges if you go over the limit.

3. Maintenance: You are responsible for the maintenance and upkeep of the car, which can be expensive.

4. Negative equity: If the car's value decreases more than expected, you may be left with negative equity at the end of the contract, which means you owe more than the car is worth and do not have any equity to use as a deposit for your next car.

5. Repossession risk: If you miss payments or can't keep up with the payments, the finance company can repossess the car, which could negatively impact your credit score.

It's important to carefully consider the pros and cons of PCP before making a decision. Make sure to shop around and compare rates and terms from multiple dealers to get the best deal for your needs and budget.

Carfound has access to a panel of lenders who can individually tailor a PCP deal for your needs and give you the best possible APR on the market. We are more than happy to help if you think PCP is the right choice for you! Representative 9.9% APR.

2. Hire Purchase (HP)

Hire purchase (HP) is a type of car financing that allows you to buy a car with a loan from a finance company, and pay it back over time with interest. With a hire purchase agreement, you typically make a deposit, and then make monthly payments over a fixed period of time, usually two to five years. At the end of the agreement, assuming all payments have been made, you will own the car outright.

The main advantage of HP is that it can be a convenient way to spread the cost of buying a car over time. This can make it easier to afford a car, as you don't have to pay for it all upfront. Additionally, HP can offer competitive interest rates, making it a more cost-effective option than some other types of car financing.

It's important to note that with HP, the finance company owns the car until you've made all the payments, which means you can't sell or modify the car without their permission. Additionally, if you miss a payment or can't keep up with the payments, the finance company can repossess the car, which could negatively impact your credit score.

If you're considering HP, it's important to compare rates and terms from different lenders, and to make sure you can afford the monthly payments over the life of the loan.

Pros and Cons of a HP Agreement

Hire purchase (HP) can be a good option for some people who want to buy a car and spread the cost over time. However, like any type of car financing, there are pros and cons to consider.

Pros of HP:

1. Convenient way to spread the cost: With HP, you can pay for a car over a fixed period of time, usually two to five years. This can make it easier to afford a car, as you don't have to pay for it all upfront.

2. Fixed interest rates: HP typically offers fixed interest rates, which means you'll know exactly how much you'll pay each month and over the life of the loan.

3. No mileage restrictions: Unlike PCP or PCH / leasing, which often has mileage restrictions, with HP you can drive as much as you want without penalty.

4. At the end of the agreement, you own the car outright: Once all the payments have been made, you own the car outright, which means you can sell it or trade it in for a new car.

Cons of HP:

1. The car is not yours until you make the final payment: The finance company owns the car until you've made all the payments, which means you can't sell or modify the car without their permission.

2. Total cost is higher than cash purchases: Interest rates for HP mean the overall cost of the car will be higher due to interest charges.

3. Monthly payments can be a burden: The monthly payments can be a burden on your finances and higher than PCP or leasing, especially if you experience unexpected expenses or job loss during the loan term.

4. Repossession risk: If you miss payments or can't keep up with the payments, the finance company can repossess the car, which could negatively impact your credit score.

Overall, HP can be a good option if you want to spread the cost of a car over time and have a fixed interest rate. However, it's important to compare rates and terms from different lenders, and to make sure you can afford the monthly payments over the life of the loan.

Carfound has access to a panel of lenders who can individually tailor a HP deal for your needs and give you the best possible APR on the market. We are more than happy to help if you think HP is the right choice for you! Representative 9.9% APR.

3. Personal Contract Hire (PCH)

A personal contract hire (PCH) is a type of car leasing agreement that allows you to rent a car for a set period of time, usually between 2 to 4 years, and then return the car at the end of the contract. Some finance companies will allow you to purchase the vehicle or extend the contact depending on their terms and policies.

With a PCH agreement, you will usually pay an initial rental payment and then make monthly payments for the duration of the contract. The monthly payments are based on the difference between the car's initial price and its estimated value at the end of the contract, taking into account factors such as mileage and condition. At the end of the contract, you simply return the car to the leasing company.

One of the main benefits of a PCH agreement is that it allows you to drive a new car with lower monthly payments than traditional financing or a personal loan. You also don't have to worry about selling the car at the end of the contract, as the leasing company takes care of that.

However, it's important to note that with a PCH agreement, you do not own the car and will need to adhere to the terms of the contract, such as mileage limits and required maintenance. Additionally, you may face additional fees and charges if you exceed the mileage limit or return the car in poor condition.

When considering a PCH agreement, it's important to shop around and compare rates and terms from multiple leasing companies to get the best deal for your needs and budget.

Pros and Cons of a PCH Agreement

PCH is a type of car leasing agreement that has its own advantages and disadvantages. Here are some pros and cons of PCH to help you decide if it's the right option for you:

Pros of PCH:

1. Lower monthly payments: PCH agreements often have lower monthly payments than HP and PCP agreements because you are renting the car instead of buying it.

2. Flexibility: At the end of the contract, you simply return the car to the leasing company, which means you don't have to worry about selling the car or dealing with trade-in values.

3. No depreciation risk: Since you are renting the car, you are not responsible for the car's depreciation or any residual value at the end of the contract.

4. New cars: PCH agreements often allow you to drive a new car with the latest technology and features that you may not be able to afford with traditional financing.

5. Maintenance and repair may be included: Some PCH agreements may include maintenance and repair costs, which can help you budget for these expenses.
6. Vehicle excise duty is included: Most PCH agreements included vehicle excise duty, commonly known as road tax, as part of the agreement

Cons of PCH:

1. No ownership: Since you are renting the car, you do not own the car at any point during the agreement.

2. Mileage limits: PCH agreements often come with mileage limits, which can lead to excess mileage charges if you go over the limit.

3. Wear and tear charges: You may be charged for any damage or excess wear and tear on the car at the end of the contract.

4. Higher long-term cost: Since you don't own the car, you will need to continue making payments to continue driving a car, which can be more expensive in the long term.

It's important to carefully consider the pros and cons of PCH before making a decision. Make sure to shop around and compare rates and terms from multiple leasing companies to get the best deal for your needs and budget.

Carfound has access to a panel of leasing providers who can individually tailor a lease deal for your needs. We are more than happy to help if you think leasing is the right choice for you!

4. Lease Purchase (LP)

Lease purchase (LP) is a type of car financing that combines elements of leasing and hire purchase. It is often referred to as "Conditional Purchase" or "HP with a balloon payment" It allows you to drive a car for a fixed period of time, usually between two to four years, with an option to buy the car at the end of the lease term.

With LP, you make an initial payment, which is usually around three to six months' worth of payments, and then make monthly payments for the duration of the lease. At the end of the lease term, you have to buy the car by making a final payment, which is often called the "balloon payment." This final payment is typically higher than the monthly payments made during the lease period, and is based on the expected value of the car at the end of the term.

The main advantage of LP is that it can offer lower monthly payments than HP or PCP, because you are essentially paying for the depreciation of the car during the lease period. Additionally, LP can provide more flexibility than PCH, as you can choose to buy the car at the end of the lease term or return it to the leasing company.

It's important to note that with LP, you may face penalties for exceeding the agreed mileage limit or for excessive wear and tear on the car. Additionally, you're committed to making the large balloon payment at the end of the agreement which typically involves a large cash sum to be paid.

If you're considering LP, it's important to compare rates and terms from different leasing companies, and to make sure you understand all of the costs involved.

Pros and Cons of LP