What is Car Finance? | LMC

Jan 12, 2022 | The Hub | 0 comments

Car finance is becoming an increasingly popular way to own vehicles nowadays as the option to space out car payments via monthly instalments. It can provide customers with breathing room and security in knowing exactly what needs to be paid monthly until the vehicle is paid off. 

There is also more flexibility with car finance as you get to choose the type of finance contract for you. The three main types, Hire Purchase, PCP and Personal Leasing, all have different requirements that suit different kinds of people. At LMC, we can help you arrange car finance for your vehicle and today, we’re going to explain car finance further. 

The Basics

Car finance is a loan you borrow from a lender in order to buy a vehicle. The conditions of this loan vary such as the loan amount, length of the contract and deposit amount. During the agreed contract period, you must keep up with the monthly repayments, otherwise, it can result in the repossession of your vehicle. The length of the contract can vary from 1 to 5 years.

The following can be used when calculating what the monthly repayments will be:

  • The car’s value and depreciation
  • Interest
  • Agreed mileage limits
  • Credit score
  • Maintenance and breakdown cover
  • Road tax

The three main car finance options; Hire Purchase, PCP and Personal Leasing each has different requirements and each has payments that are calculated using the factors mentioned above.

Hire Purchase

Hire Purchase finance is typically the simplest as you are only paying back the value of the vehicle plus interest. Payments are expensive as once you’ve made all the repayments, ownership of the vehicle will be transferred over to you. In some cases, a transfer fee may be required. 

Since you’re paying off the vehicle, you won’t be expected to stick to any agreed mileage limits as is the case with PCP and Personal Leasing finance. You don’t have much choice over what to do with the vehicle once the contract ends but, it’s a perfect option if you want to own the vehicle. 

PCP Finance

In comparison to Hire Purchase finance, PCP finance payments are considerably cheaper. This is because you aren’t paying off the value of the vehicle, you’re making payments in order to use it. Payments also take into account agreed on mileage limits and the vehicle’s depreciation as well as its value plus interest. 

The expected outcome for when you’ve made all the payments is for you to return the vehicle and take out another PCP contract on a different car. It’s important to remember that if you fail to keep to the agreed-on mileage limits you will be additionally charged. 

If you do decide that you’d like to own the vehicle once the contract ends, you can make one final payment known as the “balloon payment”. This payment will be more expensive than the monthly repayments as you’re essentially paying off the vehicle’s future value. PCP finance does offer car buyers more flexibility and can be a great choice if you prefer low payments and like to change your car regularly. 

Personal Leasing

Personal Leasing is very similar to PCP finance in terms of low payments and how they’re calculated. Where they differ is that with a personal leasing finance contract, there is no option to buy the car. You can have maintenance, breakdown cover and road tax included in the payments however this may require a large deposit. It’s also expected that you’ll adhere to the agreed-on mileage limits and keep the car in excellent condition, as you can be additionally charged if you fail to do so. 

This car finance option provides drivers with the ease and convenience of renting a vehicle and simply changing it once the contract ends. Perfect for people who like to change their car regularly, or want to drive new cars. 

At LMC, you can find supporting articles on our HUB that further explain other aspects of car finance such as:

We have over 200 used vehicles in stock and they are ready to be purchased on finance. You can use our free finance checker to determine your eligibility, and you can continue to make your application here.