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Find the Right Option for You
When it comes to buying a vehicle, there’s no one-size-fits-all solution - and that includes how you choose to finance it. With a range of finance options available, understanding the differences can help you make the right choice for your budget and lifestyle.
This guide breaks down the most common types of vehicle finance in the UK, so you can decide what works best for you - whether you're buying personally or for your business.
Personal Contract Purchase, usually known as PCP, is a type of car finance that offers lower monthly payments and flexibility at the end of the agreement.
How a PCP works
Agree Terms: You agree an initial deposit and term and decide how many miles you’ll travel each year.
Monthly payments: You make fixed, regular payments over the contract term - typically between 18 and 49 months.
Optional final payment (or "balloon payment"): A larger, optional lump sum due at the end of the contract. It's the pre-agreed amount you must pay if you want to own the car outright.
Your options at the end of the agreement
Once you've made all your monthly payments, you can decide which of the following options suits you best:
Buy the car: Pay the final balloon payment and any "option to purchase" fee. You will then own the vehicle.
Return the car: Hand the car back to the finance company with no further payments. This option is subject to the vehicle being in good condition and within the agreed-upon mileage limits.
Part-exchange the car: Trade in your car for a new one. If your car is worth more than the final balloon payment, you can use the difference as a deposit for a new PCP agreement.
Things to be aware of
You don't own the car during the contract period: The finance company owns the car until you pay the optional final payment at the end of the contract.
Mileage limits: Your contract will have an agreed-upon annual mileage limit. If you exceed this, you will face extra charges for every additional mile.
Wear and tear: When you return the car, it will be inspected for damage beyond what is considered "fair wear and tear." Damage and missing items can result in additional charges.
Negative equity: It's possible for your car to be worth less than the final balloon payment at the end of the contract. In this case, you can choose to hand the car back rather than pay for a vehicle that has lost more value than expected.
A Hire Purchase (HP) agreement is a straightforward way to buy a vehicle by spreading the full cost over a set period. You make regular monthly payments, and after the final payment, you own the car outright.
How a Hire Purchase works
Deposit: You pay an initial deposit (though zero-deposit options are available). A larger deposit will reduce your monthly payments.
Fixed monthly payments: These instalments, which cover the full cost of the car plus interest, are paid over an agreed term, typically one to five years. The interest rate is fixed at the start, making it easy to budget.
"Option to Purchase" fee: A small, one-off fee at the end of the contract is often required to transfer legal ownership of the vehicle to you.
Key features of Hire Purchase
Ownership is guaranteed: The main benefit is that you are on a clear path to owning the vehicle once all payments are made.
No mileage restrictions: Unlike Personal Contract Purchase (PCP), HP agreements typically do not have annual mileage limits or penalties for excess mileage, giving you more freedom.
Higher monthly payments: Because you are paying off the vehicle's entire value, your monthly payments are usually higher than they would be with a PCP deal.
Secured loan: The loan is secured against the vehicle itself. This means that if you miss payments, the finance company can repossess the car. Missing payments can also harm your credit score.
Can be ended early: Under the Consumer Credit Act, you have the right to end the agreement early and hand the car back, provided you have paid at least half of the total amount owed.
A Lease Purchase (LP) agreement is a type of car finance designed for those who want lower monthly payments but are committed to buying the vehicle at the end of the term. It is similar to a Personal Contract Purchase (PCP) but the final lump-sum payment is mandatory.
How a Lease Purchase works
Initial deposit: You make an upfront payment at the beginning of the agreement. The larger your deposit, the lower your monthly payments will be.
Fixed monthly payments: These instalments are typically lower than a Hire Purchase agreement because they do not cover the full value of the vehicle.
Mandatory final "balloon" payment: At the end of the contract, you must make a final lump-sum payment to own the car outright.
Key features of Lease Purchase
Ownership is guaranteed: Unlike a PCP, you are contractually obligated to make the final balloon payment and become the legal owner of the vehicle at the end of agreement.
No mileage restrictions: As you are committed to buying the vehicle, there are generally no annual mileage limits, which provides more freedom than a PCP.
Lower monthly payments: Because a large portion of the cost is deferred to the end, the monthly payments for LP agreements are often lower compared to other finance options such as HP.
Requires planning for the final payment: You must plan for the balloon payment at the end of the term. Some providers may offer the option to refinance this payment into another loan, but this can increase your total interest costs.
Risk of negative equity: If the car's market value at the end of the agreement is lower than your final payment, you will have to make up the difference to take ownership of the vehicle.
A Conditional Sale (CS) agreement is a straightforward way to buy a vehicle by spreading the full cost over a set period, with the guaranteed outcome of owning the car at the end. It is very similar to a Hire Purchase (HP) agreement, but with a key difference in how you take ownership.
How a Conditional Sale works
Deposit: You usually pay an initial deposit, though this can be flexible. Paying a larger deposit will lower your monthly payments.
Fixed monthly payments: These fixed instalments cover the entire cost of the vehicle plus interest over an agreed term, which is typically between one and five years.
Automatic ownership: Once you have made all the monthly payments, ownership of the vehicle is automatically transferred to you. Unlike a Hire Purchase, there is no "option to purchase" fee to pay at the end.
Key features of Conditional Sale
You are committed to buying the car: By signing a CS agreement, you are committing to purchasing the vehicle. Once all payments are complete, ownership is automatically transferred to you.
No mileage restrictions: CS agreements typically do not have annual mileage limits or penalties for exceeding them, which provides more freedom than a PCP.
Higher monthly payments: Since your payments are covering the full cost of the vehicle, the monthly instalments are generally higher than a Personal Contract Purchase (PCP).
Secure loan: The loan is secured against the car itself. If you fail to keep up with the payments, the finance company can repossess the vehicle.
Early settlement: You have the legal right to end the agreement early and return the car, provided you have paid at least half of the total amount owed.
PCH is a fixed cost rental agreement, available on selected new vehicles only, that allows you to drive a brand new vehicle for a set period without ever owning it. You simply hand the car back at the end of the contract. It is a popular option for those who like to drive a new car every few years with low and predictable monthly costs.
How Personal Contract Hire works
Initial payment: You make an upfront payment at the start of the contract. It's usually the equivalent of a few months' rental fees and helps to reduce your monthly costs, but can also be a lump sum payment.
Agree Mileage: You decide your annual mileage limit, noting any minimum and maximum limits that may vary by vehicle.
Fixed monthly rentals: For the length of your contract, usually 24-60 months, you make fixed monthly payments. These are typically lower than other finance options because they are based on the car's depreciation during the lease term, not its full value.
Return the car: At the end of the agreement, you return the vehicle to the leasing company. As long as you have stayed within your agreed mileage and the car is in good condition, there is nothing more to pay. You have no option to buy the car.
Key features of Personal Contract Hire
No ownership: You will never own the car, as the finance company remains the legal owner. You don’t need to worry about selling or trading in the car at the end of the contract.
No depreciation risk: The leasing company takes on the risk of the car losing value over time. You don't have to worry about the car's resale value.
Mileage limits: Your contract includes an annual mileage allowance. If you exceed this limit, you will be charged an excess mileage fee.
Wear and tear: When you return the car, it will be inspected for damage. Charges may apply for any damage that is considered more than "fair wear and tear," as defined by industry standards.
Maintenance: You are responsible for the vehicle's maintenance and upkeep, though many PCH deals allow you to include a maintenance package for an additional fixed monthly cost.
Failure to keep up with your repayments carries serious consequences;
Financial Penalties: You may incur late payment interest and additional charges for missed payments.
Credit Score Damage: Missed payments are reported to credit reference agencies, which can negatively impact your credit score and potentially make it harder or more expensive to obtain credit in the future.
Default Notice & Debt Collection: If missed payments continue, the lender may issue a default notice and could pass your account to a debt collection agency.
Potential Legal Action: In some cases, if the missed payments are not repaid, the lender might initiate legal action to recover the debt.
Group Finance Disclosure
Finance is subject to status and credit acceptance. Applicants must be UK residents (excluding the Channel Islands) aged 18 or over. Guarantees and indemnities may be required. Terms and conditions apply.
Hendy Group Limited are authorised and regulated by the Financial Conduct Authority. Our FCA registration number is: 311625. Hendy Group Limited are a credit broker and not a lender or an independent financial advisor. We do not act independently, as we have a relationship with our panel of lenders and will receive a commission from them. We act in our own interests in respect of arranging finance and do not act on your behalf. We do not assess the wider market for finance or insurance or provide any advice on whether the products we offer represent the best value you could obtain.
We will typically receive a commission from the lender for facilitating your finance agreement. This will generally be a fixed amount based on the vehicle model. It could, however, alternatively be calculated as fixed percentage of the amount you borrow. The lenders we work with could pay commission at different rates. We will provide you with details of any commission before you enter into the agreement.
