What types of car loans are available in the UK?
Car loans 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. To apply for HP, you have to pass a credit check first but, if you have bad credit, this doesn’t necessarily mean you won’t be able to get a car on HP. 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 car loan also involves loaning a sum of money from a finance company (lender). This is different to a HP agreement, however, 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 (PCP), is similar to a Hire Purchase agreement. However, the main difference is the value of the car once the contract has ended. Lenders calculate this at the start of the agreement and call it the Guaranteed Minimum Future Value (GMFV), or balloon payment. They work this out by taking into account how old the vehicle will be at the end of the agreement and how many miles it’s estimated to have done. 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.
The great thing about PCP is that you get to decide if you’d like to own the car at the end of the agreement by paying the GMFV. Alternatively, you can return the car to the lender and enter a new car finance agreement - whichever you prefer.