Car financing has become a big business. Many UK car buyers are financing their purchase with some form of finance. You can get financing from the dealer, a bank loan or leasing. But, very few people buy a car using their own money.

In the past, a private buyer would have purchased a car with a maximum value of PS8,000 if they had PS8,000 to spend. The same PS8,000 can be used to deposit on a car that could be worth many tens or thousands of dollars, and then continue to make monthly payments for up to five years.

According to various dealers and manufacturers, anywhere from 40% to 87% of car sales today are made with finance. It is no surprise that many people are jumping on the car finance bandwagon in order to make a profit off buyers’ desire to own the most flashy, high-end car they can afford within their monthly cashflow limits.

It is easy to finance a car. You can purchase a car that costs more than you can afford upfront, but you can manage small monthly cash payments over time. Car finance can be confusing because many buyers don’t realize that they often end up paying more than the car’s face value. They also don’t understand the implications of the agreements.

This author is not pro-or anti-finance in buying a car. You must consider all aspects of financing a car. Not just the purchase of the car but also the entire term of the finance. Although the UK has strict regulations for the industry, a regulator cannot force you to read all documents or make smart car finance decisions.

Financing through a dealership

Many people find financing their car through the dealer where they are purchasing the car convenient. You may also find national programs and offers that can make financing your car through the dealer attractive.

This blog will concentrate on two types of car finance that car dealers offer private car buyers: the Hiring Purchase (HP), and the Personal Purchase(PCP). A brief mention will be made of the Lease Buy (LP). Another blog will discuss leasing contracts.

What’s a Hire Purchase?

An HP is a type of mortgage. You pay a deposit upfront and then you pay the remainder over a set period (typically 18-60 months). After you make your final payment, your car becomes yours. This is how car finance has worked for many years. However, it is starting to fall out favor with the PCP option below.

A Hire Purchase has many benefits. It is easy to understand. The buyer can choose their deposit amount and term. The term can be up to 5 years (60 month), which is more than many other financing options. The agreement can be cancelled at any point without major penalties if your circumstances change. However, the amount owing could be higher than the car’s value early in the agreement term. If you intend to keep your car after paying off the finance, an HP will usually cost you less than a PCP.

An HP is more expensive than a PCP, which means that you are less likely to be able to afford the car.

An HP is best for buyers who plan to keep their car for a long period of time (ie, longer than the finance term), have large deposits or need a simple car financing plan that doesn’t end with a sting.

What’s a Personal Contract Purchase?

Manufacturer finance companies often give a PCP other names (e.g., BMW Select, Volkswagen Solutions or Toyota Access). This is a popular option, but it can be more complex than an HP. The majority of new car finance deals advertised these days are PCPs. Dealers will often push for a PCP instead of an HP as it is more beneficial to them.