Are you currently looking around for a used car and wondering if your money will stretch to be able to afford it or buy it? Which option is best for me for funding?
Well there are several funding options available on the market place today. Specific to dealership finance you will generally see a Personal Contract Purchase Agreement (PCP) or a Hire Purchase Agreement (HP) in which we look at today.
Personal Contract Purchase Agreement
Most car dealers are pushing this route and promoting the ability to change. This gives you the sense of a mobile phone contract where you change every 3 or 4 years. This route involves putting a deposit towards the car, declaring a mileage per annum you think you will cover and a fixed term for the monthly payments. Now at the end of the term you will see a Guaranteed Minimum Future Value for your car you intend to purchase. GMFV for short. This value is set by the lender to give you some options at the end of the term.
Option one, would be to upgrade your vehicle as your value of your car maybe higher than the outstanding finance to settle. Therefore equity to put into the next car.
Option two, is to keep the car by paying the final lump sum and any final purchase fees and keep it. Now lenders will allow you to refinance this amount nowadays as well in case you don’t have all the money in the bank.
Option three, if a vehicle is below the guaranteed minimum future value set by the lender then you have the option of handing the car back to the finance company and walk away with no negative equity to contend with. This right is dependent on adhering to the mileage set and if you are over, then you will have a mileage charge.
To be absolutely clear interest is still charged on the amount financed. Most people think that the GMFV has zero effect on interest and in which fact it does and its the total amount financed which interest is chargeable to.
Another big thing to note is for the novice in PCP, the deposit you put in initially is not given back to you when you change into another car. The more deposit put in reduces the monthly payment. What happens at the end of the term will be the same. And generally speaking you would need a similar deposit the second time round and the third as part of upgrading your car.
Hire Purchase Agreement
The other most popular Agreement is a Hire Purchase Agreement (HP). This takes away the Guaranteed Minimum Future Value and acts almost like a personal loan where you make equal repayments from the amount of finance you take on. The payments are generally higher than PCP due to no lump sum amount.
The payments on a Hire Purchase are from 12 months to 60 months. This type of finance mirrors a traditional bank loan. This type of borrowing is sought by people wanting full ownership at some point. If you intend to keep your car a while for example.
Both these types are purchase agreements and classed as a tri-party Agreement. This gives you some additional peace of mind of things do go wrong on certain occasions which will be discussed in one of our other articles.
In both agreements you have title ownership of the V5 or logbook if you are from the pre 2000 era.
There are generally offers from franchised dealer groups surrounding PCPs with deposit contributions and better APRs for PCP. This is because the manufacturers want you to continue a long term relationship with them and renew your contract with them when the time is right. Therefore the offers are less attractive for the hire purchase or cash customer.
How will you be funding your next car?
DL Group Corp. 