When buying a new or used vehicle through dealer-provided finance, or a finance lender, you'll have the option between several types of finance, such as Personal Contract Purchase (PCP) and Hire Purchase (HP). PCP is, however, a very popular vehicle finance type in the UK, with most motorists choosing it for its lower monthly payments, and flexibility at the end of the contract.
With PCP and HP, you will pay a proportion of the cost, by way of a deposit, at the beginning of the finance agreement, followed by monthly payments, and similar to HP, your initial deposit influences the outstanding balance. However, this is where their similarity ends.
An important difference, is that the amount borrowed with Personal Contract Purchase is a lot less as a proportion of the cost of the vehicle, as payments made are only for the depreciation of the vehicle, rather than towards its ownership, which is the usual goal of using the HP option. This means there is a considerable difference in how much the monthly repayment on a vehicle will be, compared to a typical HP repayment on the same vehicle; more affordable payments through PCP loans gives many the opportunity to own a new or used vehicle, they didn’t previously think was an option.
The fixed-term repayment amount is dependent on how much deposit is paid, the length of the finance agreement (usually 24 - 48 months/1 - 4 years) and your anticipated annual mileage. The Predicted Minimum Future Value, also known as a balloon payment, is then calculated by your financier, and is offset until the end of the agreement, where it is called a Guaranteed Minimum Future Value (GMFV). As a customer, this allows you to see how much you will be expected to pay for the vehicle, should you wish to purchase it.
Be aware, ensure you check your agreement, as you may be charged for excess mileage that exceeds your agreed amount, and your vehicle can be repossessed if you miss payments, as the loan is secured against it.
There are several, flexible options at the end of the agreement, as you can either: Own the vehicle outright, which requires a balloon payment to be made; End the agreement, and return the vehicle to the finance company; or part exchange it for another.
For those wishing to keep the vehicle, the repayment balance must be paid, along with the Guaranteed Minimum Future Value (GMFV). However, Creditas are able to offer financial assistance for customers who need help covering this balloon payment at the end of the initial term.
If you’d like to return the vehicle, you must settle the balance of the loan, and could be liable for any extra costs associated with: any excessive wear and tear, or damage; and any excessive mileage that exceeds your agreed amount, calculated as a pence per mile rate plus VAT. Any equity from a returned vehicle that is worth more than the GMFV, will either be returned as cash-back, or can be used as a deposit towards another finance agreement. If the vehicle is sold privately, any outstanding amount must be repaid to the finance company.
