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Car Finance Explained

More and more buyers are choosing finance to fund their dream cars. There are several types of car finance, each with their pros and cons – read on to work out which is right for you.

All types of finance aim to help you drive your dream car without needing a cash lump sum to pay for it upfront. The most widely recognised and popular option is personal contract purchase (PCP), but other finance methods such as hire purchase (HP) and leasing are steadily gaining popularity. There’s also the option of getting a bank loan to cover the costs. Like any finance package, you should carefully consider whether you can afford the repayments – a cash price will always be available and might suit your circumstances better.

Personal Contract Purchase (PCP)

A PCP finance agreement lets you park a new car on your drive in return for an initial deposit and a series of monthly payments. At the end of your agreement, you won’t own the car and simply hand it back to the dealer provided it’s in good condition. If you decide you want to keep the car, you have the option to buy it outright in return for a final payment – sometimes called a ‘balloon’ payment. This amount can be financed separately if you can’t afford to pay it in one go.

This price – and the amount you pay monthly – will depend on the size of the deposit, the cost of the car, the interest rate and how much the dealer expects to be able to sell the car on for when your agreement ends. This amount is often referred to as the Guaranteed Minimum Future Value (GMFV) – it’s what the car is expected to be worth after your finance period ends.

A PCP contract will usually set out the condition the dealer expects the car to be in when it’s returned and how many miles you’ll be allowed to cover. Any big bumps and scrapes – beyond usual wear and tear – could mean you’ll have to pay a fine once your contract ends. Return the car with too many miles on the clock and you’ll face a similar penalty, too. It’s important to read your contract agreement thoroughly – all these terms and conditions will be outlined.

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