What is Car Finance?
Have you ever wanted to drive a car that you can’t afford outright? Many get this feeling, and it’s completely understandable. Luckily, car finance is here to provide that opportunity, as long as you keep up to date with the monthly payments. There tends to be a selection of policies to choose from, depending on the car that you’re after, so it’s always best to shop around to find one that suits your needs and budget.
Car finance works like a phone contract or mortgage, so you’ll have to make monthly payments that reflect the overall value of your chosen vehicle. Because of this, you won’t own the car until you complete the monthly instalments, but many organisations allow you to upgrade your vehicle with a newer model instead.
PCP (Personal Contract Purchase) and HP (Hire Purchase) are the most popular options, yet both suit different types of driver, depending on their budget and ultimately, their chosen vehicle.
PCP (Personal Contract Purchase)
A PCP car finance policy is useful for several reasons, but you may never truly own the car. An upfront deposit is required that usually reflects the value of the vehicle. Once this is paid, you’ll then have to pay monthly instalments that are determined by the depreciation value of the car. This is provided at the start of the policy using a GFV (Guaranteed Future Value). You’ll also have to determine an annual mileage estimate.
Once the car finance policy is completed, you can pay a final balloon payment to own the car, or simply give the car back to the finance company. You may also be able to upgrade the vehicle to a new model, depending on the dealership.
HP (Hire Purchase)
This works in a similar way to the PCP policy, with a compulsory deposit and monthly payments. They also usually last around 2-3 years, however, you don’t pay the depreciation value of the car. Instead, you pay the entire value of the car. This means that you’ll own the car once the payments are complete. Due to the nature of this policy, you don't have to agree to a mileage estimate, as you’ll eventually own the car anyway. It’s important to note that you must complete the policy before you sell the car.
The RAC Car Finance Calculator is an especially handy tool, as it allows you to find an option that best suits your budget. It’s important to plan for your car finance before you take a policy, and our calculator allows you to do just that! With our help, you’re one step closer to a car that you’ve always wanted.