Thousands of customers choose MotoNovo Finance every week to buy their next car, van or motorbike. We offer a range of relevant products and services quickly, efficiently and competitively and have been doing so for over 40 years.
Hire purchase finance explained
Hire Purchase is exactly what it sounds like – a hire agreement which gives you an option to own the car at the end of the agreement. These are normally fixed cost, meaning that the APR (Annual Percentage Rate) is set before the contract begins. The loan period is also fixed – typically three to four years – and the finance agreement is secured against the car being bought, which means that lenders can be flexible in the terms and conditions they offer.
You are the ‘registered keeper’ of the car and responsible for insuring and maintaining it, but the finance company remains the legal owner until the amount you borrowed (plus the option to purchase fee) has been fully repaid.
A Conditional Sale agreement is the same as Hire Purchase, except that you will automatically own the car once the finance has been repaid in full. (i.e. there is no option to purchase fee)
Personal contract purchase (PCP) Finance explained
Personal Contract Purchase, or PCP, is a variation of a Hire Purchase agreement. The key difference is that the value of the car at the end of the contract is calculated at the start of the agreement and this value is deferred. This deferred sum is usually referred to as the Guaranteed Minimum Future Value (GMFV) and is based on a number of factors including how old the car will be at the end of the agreement and how many miles it is expected to have covered. The future value of the car is guaranteed by the lender so will not fluctuate. Deferring the GMFV to the end of the agreement in this way means that your regular monthly payments are lower than those on a comparable HP agreement over the same term.
A PCP agreement also gives you the flexibility to decide whether you would like to either own the car outright at the end of the agreement by paying the deferred value (GMFV), return the car to the lender or enter into a new finance agreement.
At the beginning of the agreement
Under a PCP agreement, you agree with the dealer the amount you want to borrow, less any deposit payment and value of any car you are part-exchanging. Your dealer then submits your application for finance to a motor finance company and, provided you pass their credit checks, the lender pays for the car on your behalf. During the agreement, you pay the full price of the car plus interest but minus the guaranteed future value of the car. This means that the monthly payments are usually less than they would be under a comparable HP agreement over the same term.
At the end of the agreement
You will have three options:
– You can either pay the guaranteed future value in full and own the car outright
– Hand back the keys and walk away (there may be a charge for excess mileage and/or damages)
– Trade the car in by using any existing equity (if the guaranteed future value is actually lower than the current market value of the car) as a deposit for a new finance agreement.
If you want to hand the car back but have exceeded the forecast mileage you agreed at the start of the contract, you will need to pay an excess charge. There may also be a charge for damages.
You can partially or fully settle a PCP agreement at any time, but should check the terms and conditions of the agreement as each finance company has its own procedures on how to do this.