Hire purchase
Best for
People who want a simple form of car finance that’s easy to arrange.
Typical cost
Between 7% and 13% APR.
How it works
You pay an initial deposit, normally at least 10 % of the car’s price. Then you pay the remainder,
with interest, in monthly instalments. There’s usually an administration fee to pay with the first
payment and an ‘option to purchase’ fee with the final one. High purchase offers a higher level of
consumer protection than an unsecured personal loan.
Drawbacks
You don’t own the car until the end of the contract – so you can’t sell or modify it without the lender’s permission.
Leasing
Best for
People who want a new car regularly without the hassle of owning it.
Typical cost
Monthly payments are normally between £100 and £400 a month.
How it works
You choose your vehicle and how long you want it for, and state your annual mileage. These three factors determine your monthly payments. With
some schemes, you can opt for the payments to include maintenance.
Drawbacks
You normally pay a few months’ rental in advance. And you have to take out comprehensive insurance to cover damage – which is costly for
expensive cars.
Personal contract plan
Best for
People who want to keep repayments low and like a new car every two to four years.
Typical cost
Between 7% and 14% APR
How it works
You put down a deposit, pay monthly instalments as you go along, and leave a lump sum to pay off at the end of the contract. The amount you defer, which is set by the finance company, is called the minimum guaranteed future value. The lender guarantees that your car will be worth that amount at the end of the contract.
When the contract ends, you have three options:
• Pay the deferred sum and keep the car
• Sell the car privately to fund the final payment
• Hand the car back to the dealer
If the car is worth more than predicted, you can use the difference as a deposit on a new car. PCPs offer a higher level of consumer protection than an
unsecured personal loan.
Drawbacks
PCPs usually work out more expensive overall than hire purchase, especially if you decide to pay the final deferred sum to buy the car. And there are
a couple of complications. First, you have to estimate your mileage – and you’ll be charged