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Car Finance

Money and credit

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These pages aim to help you to take control of your spending and avoid getting into debt. If you are in debt you'll find out where to get free advice.

We all sometimes spend far more than we mean to. It is all too easy to get the things we want without stopping to work out how we will pay for them when the bills roll in.

Deciding how to finance your car is an important decision many of us need to make. In 2012, a huge 70% of all new cars buyers used finance from their dealer to pay for their purchase.*

This guide will walk you through three of the most popular finance plans – Hire Purchase (HP), Personal Contract Hire (PCH) and Personal Contract Purchase (PCP) – to help you decide which is right for you.

Hire Purchase (HP)

Hire Purchase (HP) is one of the most popular ways of financing your vehicle. You normally pay an initial deposit followed by monthly payments and, when all the payments are made, the car is yours.

You’ll be able to drive away with a car you wouldn’t be able to afford to buy outright.
You’ll pay less overall to own the car than with other deals such as Personal Contract Purchase (PCP).
Once you’ve made your final payment you own the car.

Things to bear in mind
Monthly payments will be higher than with other deals such as PCP.
You won’t be able to sell the car without settling the finance.

Personal Contract Hire (PCH)

Personal Contract Hire (PCH) is a type of long-term rental that will suit you if you’re not looking to buy. You lease the car for an agreed period of time by making fixed monthly payments. When the contract expires, you simple return your car or take out a new lease.

It’s hassle free, as you can drive away a new car without worrying about the warranty running out or how to resell.
Your monthly payments will be much lower than if you were buying.
You can hire new or used vehicles.

Things to bear in mind
There’s no option to buy the car at the end.
It’s important that you are aware of mileage restrictions.
You’ll have to take out comprehensive car insurance.

Personal Contract Purchase (PCP)

Personal Contract Purchase (PCP) is similar to PCH, but you’ll have the option to buy the car. You’ll usually pay an initial deposit, followed by monthly payments. A Guaranteed Future Value (GFV) – ‘balloon payment’ – is also initially calculated which is the car’s expected value when your payments end. Once your payments are finished, you’ll have three options:

1. Buy the car by paying the final payment
2. Hand the car back
3. Part exchange for a new car

The monthly payments are usually lower than HP, which gives you access to high spec models.
If you decide not to buy the car, you can still walk away when you’ve made all the monthly payments.
Similar to PCH, you can drive away a brand new car every three years without worrying about it running out of warranty or about selling it on.

Things to bear in mind
If you want to buy your car, PCP is more expensive than an HP agreement.
You don’t fully own the car until the final payment is made.
You’re limited to the initial agreed mileage – going over this may cost you extra.

Which is best for me?

It depends! If you’re someone who likes to change their car every three years, a PCP or PCH deal makes it easy to do this. I
f you’d prefer to own the car at the end of your payments, HP is the best option.

Most people get into debt because they have bought things with a credit card, a credit agreement or a loan and have then got behind with the repayments. Perhaps they did not budget carefully enough in the first place and agreed to a payment plan they couldn't possibly keep. Or perhaps things changed and they suddenly had less money coming in.

There are lots of times when it makes sense to borrow money, either by getting credit or taking out a loan. The trouble is, it is not always easy to work out exactly how much it will cost us. There are so many competing schemes to choose from that most of us need advice on how to get the best deal.

These pages will help you if you are thinking of borrowing money, want to know the best way to get credit or take out a loan, or find you can't keep up the repayments.

Get the answers to these questions before you sign:

How much will the credit cost you compared with other similar deals?
Compare the APRs. Usually the lower it is, the less you pay. But there may be other charges not included in the the APR, so find out what these are. You need to be sure how much you are paying in total.

Is your home being used as security?
If your home is used as security for a loan and you don't keep up repayments, you could lose it.

Is it the best deal and interest rate you can get?
Buying credit is like buying anything else – you shop around for the goods so do the same for the credit. The credit offered to you when you buy may not be
the best deal.

Do you fully understand the credit agreement form you're about to sign?

Don't be pressured into signing a deal at the till – if you don't understand it, take it away and get advice. Remember you can't change your mind if you sign in the shop.

Will the interest rate stay the same?
Ask if the interest rate is fixed or will change. Find out if the rate offered is an introductory rate.

Are there extra charges if you repay the debt early?
Some lenders charge an extra fee if you pay a loan off early.

What happens if you miss a payment?
There are often penalty fees if you miss a payment which can greatly increase how much you will have to pay back.

What do you have to pay each month and for how long?
It's important to look at how long you'll pay back as well as how much. For example £20 each month may be affordable but if it's for 10 years you're paying back a lot more than if it's for two years.

What's the total amount that you will pay back?
The longer the period of the loan the more you'll pay back. That's why it's important to pay off as much as you can each month on a credit card – the longer you take to pay back the more it will cost you.

Can you take the credit agreement away to consider at your leisure?
A credit agreement is a legal document – you need
to read it carefully before you sign.

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