Guide
Bike Finance Explained
Trying to get your head around motorbike finance? Don’t know your balloon payments from your monthly instalments, or your PCPs from your PCHs, let us help you.
Words by: Auto Trader
Last updated on 16 September 2020 | 0 min read
Finance can allow you to spread the cost of your new bike over a period of time.
There are a number of different types of finance and understanding the differences between them can be difficult. Once the financial acronyms start flowing, it’s very easy to get confused. That’s where our bike finance glossary can help. We’ve put together a list of the complicated terms that a salesperson may start throwing around when talking about ways to pay for your bike, along with explanations for each, so you’ll feel prepared when talking about your options. First off, here’s a brief explanation of the different types of bike finance…
There are a number of different types of finance and understanding the differences between them can be difficult. Once the financial acronyms start flowing, it’s very easy to get confused. That’s where our bike finance glossary can help. We’ve put together a list of the complicated terms that a salesperson may start throwing around when talking about ways to pay for your bike, along with explanations for each, so you’ll feel prepared when talking about your options. First off, here’s a brief explanation of the different types of bike finance…
Hire Purchase (HP)
A hire purchase is a way of buying where you pay a deposit up front, then pay off the rest of the balance (including the interest) in equal monthly instalments. The motorbike will be yours at the end of the agreement.
By paying a bigger deposit on a hire purchase, you can make your monthly payments smaller. The repayments are often higher compared to other types of finance, but your payments don’t change until the end of the agreement and there isn’t a final fee to purchase the bike. Provided you keep up with your payments, you will know exactly how much you are paying, and for how long, and the bike is yours at the end of the agreement.
By paying a bigger deposit on a hire purchase, you can make your monthly payments smaller. The repayments are often higher compared to other types of finance, but your payments don’t change until the end of the agreement and there isn’t a final fee to purchase the bike. Provided you keep up with your payments, you will know exactly how much you are paying, and for how long, and the bike is yours at the end of the agreement.
Personal Contract Purchase (PCP)
For a Personal Contract Purchase (PCP) you pay an initial deposit followed by monthly instalments, however a large portion of the loan is postponed until the end of the agreement. You can either; pay that final sum to own the motorbike, hand the bike back or start a new agreement.
Provided you haven’t exceeded your pre-agreed mileage limit and the bike hasn’t suffered damage over and above normal wear and tear, you can hand it back and walk away, or you can exchange it for another bike from the same dealer, using any equity you’ve built up in your current motorbike towards your down-payment. The amount of deposit, monthly payments, final payment and length of agreement can all be adjusted to suit you. Monthly payments are typically lower than on Hire Purchase, which means you can afford a swankier bike for your money, or take the opportunity to just pay a bit less.
Provided you haven’t exceeded your pre-agreed mileage limit and the bike hasn’t suffered damage over and above normal wear and tear, you can hand it back and walk away, or you can exchange it for another bike from the same dealer, using any equity you’ve built up in your current motorbike towards your down-payment. The amount of deposit, monthly payments, final payment and length of agreement can all be adjusted to suit you. Monthly payments are typically lower than on Hire Purchase, which means you can afford a swankier bike for your money, or take the opportunity to just pay a bit less.
Personal Contract Hire (PCH)
PCH is technically a method of leasing a bike, rather than buying it. You can expect to pay a deposit and low monthly instalments, but you can’t purchase and own the bike.
With that said, it’s still a way of getting a brand new bike for affordable monthly payments. You typically pay a deposit and monthly instalments - both of which tend to be lower than with HP or PCP, but remember this is because you can’t own the bike outright. At the end of the agreement you will either have to hand your bike back (provided you haven’t exceeded your pre-agreed mileage limit) or sign up to a new agreement.
With that said, it’s still a way of getting a brand new bike for affordable monthly payments. You typically pay a deposit and monthly instalments - both of which tend to be lower than with HP or PCP, but remember this is because you can’t own the bike outright. At the end of the agreement you will either have to hand your bike back (provided you haven’t exceeded your pre-agreed mileage limit) or sign up to a new agreement.
Here are some terms you might hear frequently…
Annual Percentage Rate (APR)
APR is the amount of interest you’ll pay yearly on the money you’ve borrowed, including the fees that apply - this enables you to accurately determine and compare the overall annual cost of your agreement.
The amount of interest you’ll pay yearly on the money you’ve borrowed, including the various fees that apply, so that you can accurately determine and compare the overall annual cost of your agreement. APR should not be confused with the ‘Flat Rate’, which is the rate of interest not including fees. When comparing finance deals, always make sure you’re comparing like-for-like.
The amount of interest you’ll pay yearly on the money you’ve borrowed, including the various fees that apply, so that you can accurately determine and compare the overall annual cost of your agreement. APR should not be confused with the ‘Flat Rate’, which is the rate of interest not including fees. When comparing finance deals, always make sure you’re comparing like-for-like.
Balloon payment
This is the large final payment at the end of a PCP agreement that you pay to own your motorbike outright.
Essentially it’s a portion of the loan amount that’s deferred until the end of the loan, this often makes your monthly payments lower. You can always choose not to pay the balloon payment but this means you won’t own the bike. Usually, the balloon payment is the same amount as your bikes’s Minimum Guaranteed Future Value or MGFV.
Essentially it’s a portion of the loan amount that’s deferred until the end of the loan, this often makes your monthly payments lower. You can always choose not to pay the balloon payment but this means you won’t own the bike. Usually, the balloon payment is the same amount as your bikes’s Minimum Guaranteed Future Value or MGFV.
Credit agreement
A credit agreement is the document which details the terms of the finance offer you enter into with the finance company.
Credit history/rating/credit/record
This is information on your previous borrowing record, which a lender will check in advance to decide if you’re a reliable person to lend to. Your credit history is checked frequently for other purchases such as mobile phones, insurance and also for taking out financial products such as credit cards or bank accounts.
Depreciation
The value that your bike loses over time due to things such as age, mileage and wear and tear.
Equity
Equity can be positive or negative.
Equity is when the market value of your bike is more than what you still owe on it. When this is the case, you can either pocket the difference or use it towards a deposit on your next bike. Negative equity is when you owe more on the bike than it is worth. Unfortunately, you’ll be liable for the difference. Sometimes you can settle the amount yourself, or you may possibly be able to carry the amount you owe across to a new deal for another bike.
Equity is when the market value of your bike is more than what you still owe on it. When this is the case, you can either pocket the difference or use it towards a deposit on your next bike. Negative equity is when you owe more on the bike than it is worth. Unfortunately, you’ll be liable for the difference. Sometimes you can settle the amount yourself, or you may possibly be able to carry the amount you owe across to a new deal for another bike.
Financial Conduct Authority (FCA)
The FCA are a body who regulate the UK’s financial services industry. Their aim is to protect consumers and monitor the conduct of lenders to help ensure stability.
Fixed rate
When you have a fixed rate, your monthly payments won’t be affected by changes in the interest rate (e.g. Bank of England Base Rate) and will always remain the same.
Flat rate
The flat rate is the amount of monthly interest you’ll pay, not including fees. That’s what makes it different from APR, it doesn’t include fees.
Guaranteed Asset Protection insurance (GAP insurance)
If your bike is stolen or written off during your finance agreement, you’ll still be legally liable to pay off any outstanding finance on it.
You’d assumer your insurance would take take care of that, but this isn’t always the case. Regular insurance will usually only pay out the market value of the bike at the time of the incident, factoring in depreciation, regardless of what you paid for it or how much you still owe, and that means there can sometimes be a shortfall. GAP insurance is designed to protect you against that shortfall by making up the difference between your insurance payout and the balance owed.
You’d assumer your insurance would take take care of that, but this isn’t always the case. Regular insurance will usually only pay out the market value of the bike at the time of the incident, factoring in depreciation, regardless of what you paid for it or how much you still owe, and that means there can sometimes be a shortfall. GAP insurance is designed to protect you against that shortfall by making up the difference between your insurance payout and the balance owed.
Mileage allowance (or excess mileage)
A mileage allowance or excess mileage is a pre-agreed mileage limit imposed, designed to protect the bike’s value, which lasts for the duration of your agreement. The size of your deposit, monthly payments and (if applicable) final payment will be calculated based on this.
Minimum Guaranteed Future Value (MGFV)
This is the absolute lowest amount that your bike will be worth at the end of your agreement. This is important because this value (calculated by the lender) will be used to calculate the amounts of your deposit, monthly payments and (if applicable) balloon payment.
Part-exchange
Part ex is when you trade-in your existing bike you can use its value as part of the payment for a new one.
Residual (or resale) value
The value of your bike at the time you part ways with it.
Term
The term is the period or duration that you are required to make repayments. You’ll find this in your agreement, as the number of months over which your payments are spread.
Total amount payable
The total amount you’ll have paid come the end of your finance agreement. This figure includes your bikes’ on-the-road price, plus any interest and charges which may be applicable.