Used Car Finance Explained – Know which one suits for you

Why should I know about the finance deals for buying a used car? There are two reasons you prefer to buy a used car through financial plans or unwittingly pay for the financed car. However, you can check the pending finance on a car through a full history check, specifically what type of agreement they signed before.

More expensive and premium vehicles flood the auto market; car finance is becoming the most popular method of purchasing an automobile. Buyers prefer to acquire the latest models, but they don’t have the funds to pay for them on the spot.

What if you can buy the vehicle now and pay for it in installments every month? Car finance does precisely this; ease the payment process. However, car finance can be challenging to understand if you’ve never secured it before.

It’s vital to know the crucial details before you seal a deal. Today, we’ll discuss different types of car finance, how they work, and the risks and benefits of each.

What are the types of car finance in the UK, and how does it work?

You pay for a vehicle over a set of periods of in-car finance instead of buying it outright with cash. The most common car finance agreements are:

  • Hire purchase (HP)
  • Personal contract purchase (PCP)
  • Lease purchase or personal loans

Though other options are also available, your payments will vary depending on several factors. It includes the amount you’re looking to borrow from the financial institution and the length of time you intend to keep your car. And ultimately, it’s essential to understand how they differ and why one option may be better suited to you than another.

Hire Purchase (HP)

In hire purchase, the process begins with choosing the car you like, and the HP agreement will be initiated; you should pay a down payment. As per the terms mentioned in the contract, such as the monthly instalment and additional charges.

At the termination of the hire purchase contract, you will pay the final balance and own the vehicle for a lifetime. A key aspect worth noting is that an HP contract does not include any balloon payment paid at the end of the agreement.

When you find the used car finance agreement is HP, you can own the vehicle only after paying the full debts. Until then, the finance company will be the legal owner. Either do ask the seller to settle or walk away from the deal.

Personal Contract Purchase (PCP)

A Personal Contract Purchase agreement is a bit complicated compared to a hire purchase. It’s like renting a car for a long term period. Until the contract ends, you can use the vehicle without any worries. After the contract expires, you can return the car; pay the resale value to keep it with you.

Personal contract purchase has criteria like the agreement tenure between three to five years. You should pass the credit check and deposit upfront payment to avail PCP. Moreover, calculating the total amount you will pay over the entire contract length is often higher than personal contract hire.

In short: If it is a PCP deal, it has three options: return the car, exchange the car, or refinance the car. The legal ownership will be the car finance company in all these options. In the end, the car legal ownership of these financial deals remains with the finance company.

Considering this fact, it is always risky to buy such used cars, and also, there are legal restrictions to sell the car with outstanding finance.

Personal Contract Hire (PCH)

PCH (Personal Contract Hire) is a form of leasing that allows you to use a car for between one and four years. Now, it accounts for 11% of all finance taken out on new cars, making it an excellent option if you drive a new car often and want to keep your monthly payments low. A cheap car lease can be arranged on all makes and models. 

What would happen if the used car already holds it?

It is similar to a hire purchase where you are not indebted to buy a car at the end of the financial agreement. But you will have the option to complete the deal by settling the debt amount. Until then, the legal ownership is with the finance provider.

Comparing your car finance deals

It’s important to have possible choices when looking for the best deal suited to your driving needs and financial circumstances.

If you do your own research, you may be able to get a better deal than if you took out financing directly with the dealership.

You should consider carefully which type of car finance deal is right for you. Don’t forget to read the terms of the car finance you’re taking out, and if you will be able to afford both the payments and the running costs. You can use a car finance calculator to check out the monthly repayments.

The products explained in this article may differ from those offered by other financial providers. It’s always crucial to thoroughly check all the details of any finance agreement you decide to take out.