Car financing is a great way to buy a car if you do not have the whole amount needed to purchase upfront. In recent years car financing has become increasingly popular as it allows more flexibility. You pay a monthly instalment and get the option to upgrade or change your car every few years. There are several pros to financing a vehicle rather than purchasing outright. Still, many people get slightly confused by the financing options available.
The main two financing options are PCP or HP finance, but what is the difference?
You will burrow less with a PCP agreement as you do not pay off the car’s total value. Instead, you pay off a proportion based on how much value the car will lose over the length of the contract. This is called the minimum guaranteed future value (MGFV). The difference between the car’s value from new to the end of your contract will vary based on brand and mileage.
You will still pay a deposit, reflecting how much you pay monthly – the larger the deposit, the less your monthly instalments will be. Once you have completed your contract, you will have two choices.
- Return the vehicle to the dealer and end the contract.
- Make a balloon payment and own the vehicle.
HP finance works the same as PCP finance. The only difference is that your monthly instalments will be higher as you will be paying to own the vehicle at the end of your contract. You will usually pay a higher deposit also. But at the end of your agreement, you will own the car.