Understanding the Different Finance Options Available to Drivers

The release of the 65-reg plate is now just around the corner, with thousands of motorists across the UK set to head to their local car dealerships from September 1st to get their hands on a brand new vehicle.

As well as broad range of just released vehicles set to be on show, drivers should also be aware of the many different types of finance options that they will have available in order to afford the car that catches their eye.

To help, specialist car dealership Inchcape Volkswagen has detailed six common types of vehicle finance that car salesmen are likely to begin discussing with you once you have decided to invest in a fresh set of wheels. Read on to ensure you understand what the options entail.

Contract Hire

Think of contract hire as an operating lease. This is because you will have the opportunity to drive the new vehicle that you choose on a fully inclusive basis, but at the end of the contract all you need to do is hand the vehicle back to the dealership.

Another fantastic aspect of contract hire is that they usually offer a low initial outlay — often just three months of advanced rental is required — while a contract can be as short as one year long. In effect, you can enjoy driving a fresh-from-the-factory car on an annual basis.

A word of caution: Drivers should be aware that there will be an additional charge applied should they go over the mileage set out in a contract hire offer. This charge will be known from the beginning of a contract, so be sure to look out for it and consider if you are likely to remain within the mileage.

Finance Lease

Finance lease options provide the perfect balancing act between enjoying a minimal outlay for a new car and benefitting from maximum tax efficiency too. On top of this, there are various rental patterns available when it comes to opting for a finance lease — finding the one that perfectly suits your cash flow shouldn’t be a problem.

A word of caution: Once a finance lease period comes to an end, the vehicle will be sold and any proceeds from the transaction will be used to make the final balloon period. However, if the proceeds is less than the size of the balloon payment, you will need to fund the shortfall.

Lease Purchase

With a lease purchase, you will first make a low deposit payment and then cover the remaining costs for a vehicle at a fixed rate over a period of time that will be agreed between the driver and the car salesman.

Once you reach the end of this agreed period — often two or three years after the deposit was paid — you will then make a final balloon payment in order to bring the agreement to a close and take full ownership of the vehicle.

A word of caution: Don’t forget about the balloon payment. This is calculated at the start of an agreement, so it could be years before you need to carry out the transaction.

Hire Purchase

There’s not a lot to separate a hire purchase option from a lease purchase option — you put down an initial deposit at the start of an agreement and then make repayments on a monthly basis over a period of time.

However, the key difference is that there is no balloon payment once the last monthly transaction has been made. Instead, once you have come to the end of the agreement, you simply take ownership of the vehicle.

A word of caution: As there is no balloon payment associated with a hire purchase, take note that the monthly payments will be greater or will last for a much longer period than if you were to get the same vehicle through a lease purchase agreement.

Personal Contract Purchase

Personal contract purchase (otherwise known as PCP) can be defined as a means of renting a vehicle over a set period of time, making fixed payments on a monthly basis. The amount you pay will depend on the size of the deposit you agree to at the beginning of the agreement, which can be in the form of cash or from the value of a car that you part-exchange.

An especially eye-catching aspect of PCP though is the various options you are provided with at the end of an agreement:
1. Swap your current car for a brand new one.
2. Cover the cost of the final balloon payment and own the car outright.
3. Hand the car back to the manufacturer with nothing more to pay.

A word of caution: Be aware that if you choose option number three, you will no longer have the choice to use the vehicle as a means to cover the deposit of your next car. Be sure to read our guide on PCP finance for more information and advice regarding this particular form of vehicle finance.

Personal Contract Hire

Also referred to as PCH, personal contract hire is quite a simple concept to understand. You begin by putting down a low initial payment and then make fixed monthly payments for an agreed lease period. At the end of the agreement, all what’s left to do is give the car back to the dealership and walk away free of any further commitments to the vehicle in question.

A word of caution: Well, a few in fact. While PCH is very easy to understand, take note that they will be additional fees for any wear and tear beyond what the dealership would expect during the lease period, as well as if the monthly mileage limit that you agree to is exceeded. Bear in mind that the car has to be handed back at the end of the agreement too — there is never an option to own the vehicle. Check out our PCH finance guide for more on this topic.

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