What types of car finance loans are there?
Car finance generally comes in three different types:
A Hire Purchase agreement or HP is where you borrow a sum of money over a set period of time from a finance company (lender), to buy a vehicle. You will pay monthly installments back to the lender until the term is completed and the finance is paid in full. Once you have completed the installments you will then own the vehicle. HP is one of the most popular types of finance as it is more affordable in the long run as it does not incur having to pay a GMFV (Guaranteed Minimum Future Value) at the end of the finance agreement.
Unsecured Personal Loan
An unsecured personal loan is where you borrow a sum of money from a finance company (lender) over an agreed period of time. This is different to a HP agreement as you can spend the money you have borrowed on whatever you want. If you were to use the funds to buy a vehicle you would be the owner straight away.
Personal Contract Purchase
Personal Contract Purchase, or PCP, is a variation of a Hire Purchase agreement. The key difference is the value of the car at the end of the contract. This is calculated at the start of the agreement and is usually referred to as the Guaranteed Minimum Future Value (GMFV) or balloon payment. This figure is based on how old the vehicle will be at the end of the agreement and how many miles it is expected to have covered. Because you pay the GMFV at the end of the agreement, this means that your regular monthly payments are lower than those on a HP agreement over the same term.
A PCP agreement also gives you the flexibility to decide whether you would like to own the car outright at the end of the agreement by paying the GMFV, or returning the car to the lender and entering into a new car finance agreement.