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PCP, HP, Balloon Payments: Car Finance Explained

Lucy Miller 21st Apr 2021 One Comment

Reading Time: 4 minutes

Car finance
If you’re thinking of buying a car, you’ll have a few decisions to make. Before settling on the size, colour and model of car that will fit your lifestyle, you’ll firstly need to work out how much you can reasonably pay for it. And part of that is considering whether you’ll take out car finance – a useful system that means you don’t have to pay for this major purchase fully outright.
Many of those buying a car (not just first time buyers) take out car finance, so this is not an unusual way to go about this purchase. You still need to know the details, though, however common this financing method is.

If you’re buying your first car, you might not be familiar with the different types of car finance and what the process around it is. Here, we’ll give you a brief explanation, going over the different types of car finance and considering whether this is likely to be the right option for you.

What is car finance?
Are banks an option for car finance?
Should you get car finance?
Typical costs
Buying second hand

What is car finance?

Car finance can cover a number of different options, although at the end of the day they all allow you to buy a car without having to pay for it straight-up in cash.

Types of finance option include:

PCP deals: PCP (personal contract purchase) deals are popular amongst those buying cars on finance. They allow the buyer to spread the cost over a period of time (for example two or three years), after putting down an initial deposit. At the end of the repayment period, buyers can make a ‘balloon payment’, often more than as standard monthly repayment, after which they will own the vehicle outright. If the buyer doesn’t want to make the balloon payment, they can often return the car without having to pay it.
HP deals: HPO (hire purchase) deals work in a similar way to PCP deals, but under the assumption that you are ‘hiring’ the car until you have made the final repayment. At this point, the car becomes yours outright. With an HP deal, you may not need to put down an initial deposit, and you may not need to make a balloon payment as you reach the end of the repayment period. Once your final payment has been made, the car is yours outright.

Are banks an option for car finance?

Whilst these car finance options will be available through a car dealership, you might want to consider finance through your bank instead. Remember that the car dealership will be going through a bank if you take out finance through them anyway; by going directly to the bank you’re just cutting out the middleman.

There are pros and cons to going via a bank rather than a dealership. A bank might offer cheaper finance, for example, because there will be no mark-up as there might be with a dealership offer. On the other hand, deals such as 0% APR for a certain period of time might be available through dealerships, as they want to clinch the sale from you. Of course, it’s also pretty straightforward to take out car finance through the dealership: you can make your purchase, set up repayments, and take your car away within a few hours.

If you want to think more about car finance via a bank rather than a dealership, there’s more information on this on Autotrader.

Should you get car finance?

Car finance is a great option if you want to pay back your purchase over a period of time, for example a couple of years. It’s a popular option for those who don’t have the thousands of pounds that are needed to make a car purchase outright sitting ready in the bank… which, let’s face it, is most of us.

If you’ve got a salary coming in and can pass a credit check, you shouldn’t have any problem taking out car finance. Of course, you should always make sure you’ll comfortably be able to make your repayments. If you don’t make the necessary, your car could be seized or you may have to sell it (with the agreement of your lender) and go for a cheaper option. Although your car finance will appear on your credit rating (as with any finance you take out), it will not negatively affect your credit rating – unless you fail to make your repayments.

Typical costs

As with any major purchase, the cost of your repayments will vary wildly depending on the model of car that you decide to purchase. You can, of course, put down a higher deposit that will allow you to reduce your borrowing amount and interest payments.

Typical car finance deals will expect repayments for between one and five years. The longer your contract, the lower your repayments – but the longer you will be paying interest on your purchase. Remember to look for a deal with the lowest interest rate possible, so you don’t find yourself overpaying.

Buying second hand

If this is all sounding a bit complicated, you might want to consider other options. For example, should you consider a second hand car cash purchase outright, instead of a new car on finance?
Only you will know the answer to this question. If you’re considering buying a car outright, you need to first work out exactly how much you can afford to spend. If you have some cash saved specifically for this purpose, this might be a good option.

If you do decide to go for a second hand car, make sure you know exactly what it is that you’re buying before you part with any money.

Check the price of cars using this calculator below

Do you have something to say on car finance? Want to share your tips for buying second hand instead? Share your story over on the forums.

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3 years ago

Some very useful advice here. Thanks.

Jasmine Birtles

Your money-making expert. Financial journalist, TV and radio personality.

Jasmine Birtles

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