Buying a car? What credit agreement suits you best
Have you been thinking about buying a new car? Perhaps you want to finish off some work in the house? Maybe, you just have an expensive hobby!
Credit comes in many different shapes and sizes. From quick payday loans to even bad credit loans that can be as low as £100, to larger-scale mortgages, which can easily reach into the millions. Obviously, each product is designed for different needs, but it’s still important to know the benefits of each type of funding before you commit to any loan.
Some loans are much more common than others, meaning there’s a wide range of information already out there. Most of us know what a mortgage is for example, or where to go to use loan comparison tool to search through payday loan providers.
What we’ll look at today are specific types of medium-term to short term loan agreements. So, hire purchase agreements, PCP (personal contract purchase) agreements and lease hire. Each of these come with their own set of benefits that borrowers may prefer over another product, and they all work in slightly different ways.
Whilst they’re fundamentally very similar, it’s still incredibly important to understand the differences and how they affect you as a buyer. Let’s jump straight in:
Hire purchase agreements are generally associated with vehicle financing. They are commonly used for medium-high value purchases, with a (usually) VERY high-interest rate. For example – lets use a little Kia Picanto as an example, lets say it has a retail price of around £10k. After 5 years, with some of the rates on the market you could end up paying close to £15,000, add another few £1000 to that and you could of bought two!
A hire purchase loan is considered to be medium-long term. The terms you agree will vary between each provider, but hire purchase arrangements tend to last for around 1-5 years. The longer you pay the balance off, the more you’ll end up paying in total due to the increased amount of interest. This does also make your monthly payment smaller though, so it swings in roundabouts!
The phrase hire purchase describes the finance scheme very well. You have the product on hire until the very last payment you make, when it will officially become solely your own. Up until that point, it will be owned exclusively by the lender. Don’t be put off by this, though, as it can still provide a great way to purchase something that you otherwise might not have been able to afford.
Personal Contract Purchase (balloon)
When you agree a hire purchase plan, weight up whether you want to pay a set amount of the balance every month until you’ve cleared it. Or, if you’re looking to make lower monthly payments with a ‘balloon’ payment at the end, also know as PCP – personal contract purchase.
Most dealerships will now allow you to make a lower monthly payment over a shorter period of time. This is usually 3 years, with a ballooned amount to pay off at the end. They’re very similar to interest-only mortgages in the way that you’ll only be paying off a small portion of the balance before you’re expected to clear a large amount as the agreement ends.
Not everyone can afford balloon payments. However, for example… If there’s still a £3,000 or so balance left at the end of the contract, you can either give the car back to the dealership and arrange finance on a new vehicle, or take out a loan to cover the total remaining cost.
PCP agreements are great for people who like to drive new cars, as they can give you the chance to get a brand new vehicle every three years or so.
Lease hire agreements, similar to hire purchase agreements, are exclusively used to rent vehicles (or other large goods). As a consumer, you will never officially ‘own’ the product. You’ll be paying a company to simply ‘borrow’ a vehicle for an extended period of time.
Many people are put off by lease hire agreements as they don’t like the idea of paying for something that they don’t actually own. Whilst I do completely understand this train of thought, lease hire does have a few advantages that might make it worth looking into.
For example: as you will not own the vehicle, it will not be your responsibility to pay for regular services or ongoing maintenance costs. It will vary depending on which company you lease from, but they will usually pay for any repairs and services themselves.
You’re also much more likely to be paying lower monthly expenses as you’re not waiting to outright buy the vehicle!
If you’re looking to finance a new vehicle, you should consider every option available. If you would prefer to just take out a personal loan, why not see how LoanBird can help?