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Alternative Finance
We all know about purchasing vehicles with cash, a bank loan or on hire purchase, but did you that there are other paths to buying the car of your dreams.
Personal Contract Purchase (PCP)
You be familiar with PCPs by various manufacturers' names, such as Ford Options, Nissan Preferences or BMW Select. They all work in the same way and are perfect if you plan to change cars regularly or if you want cheap monthly payments.
A PCP involves the payment of a sizeable deposit and then a number of low monthly payments. At the end of the finance agreement, there are a number of options depending on whether the customer wants to carry on or end the agreement:
- Pay a balloon payment and keep the car
- Hand the car back and pay nothing
- Put the car down as the deposit on your next vehicle
The size of the balloon payment is determined at the outset of the agreement, and is taken into account when the original deposit and monthly payments are calculated.
The car will have a guaranteed future value. This is the calculated value of the car at the end of the agreement and it is taken into account when calculating monthly payments.
PCPs don't suit everyone's needs, however. The car belongs to the finance company until the deal is completed and there are penalties for early settlement. The car must be kept in good condition during the agreement - any damage or excess mileage will be taken from the final value of the vehicle.
Personal Contract Hire
Contract hire has always been popular with companies, but more and more private individuals are seeing the benefits of personal contract hire schemes.
Contract hire is very much like hiring a car over a fixed term. You simply pay a fixed monthly amount over the period of the agreement. When the agreement has ended, you simply hand the car back, leaving you open to start another contact or walk away.
The benefits of contract hire are that there is minimal initial outlay and a fixed monthly payment that is very easy to budget for (this is why contract hire is so popular with companies). There are also no depreciation or disposal issues to deal with so the only additional costs are consumables such as fuel and insurance.
As with PCP schemes, there are penalty fees payable if the car had covered more than the agreed mileage, or if there is any damage to the car. However, maintenance schemes can be built into the agreement, meaning that if there is a mechanical failure, the finance house will cover the bill.
Glossary
0% Finance - a finance agreement with no interest charges. If you take this finance option on a £10,000 car, you pay back £10,000.
APR (Annual Percentage Rate) - the real cost of borrowing. The lower the APR, the cheaper the loan.
Balloon payment - the large payment at the end of a PCP.
Cost to change - the bottom line of what it will cost the buyer to change your vehicle. It is the difference between the trade-in value of your car and the price of a replacement car.
Depreciation - the value that your car loses over a period of time.
Equity - the difference between the value of the car and what you owe on it.
Flat rate - the amount of interest payable annually as a percentage of the total amount borrowed. (This is always lower than APR as this does not include extra charges)
Negative equity - when your car is worth less than your outstanding finance.
Residual value - the value of your used car taking into account depreciation, condition and mileage.
Trade value - what your car is worth in the trade. This will be lower than the retail value of your car as the trade has to allow for mark up on vehicles they sell.