You probably have a dream car in mind and you already know that you’re going to finance it. But between a hire purchase arrangement and a personal contract purchase deal, you’re not yet sure which one to choose. 🤔 They seem quite similar because the cost of the vehicle will be spread over a certain period, making your purchase more affordable. But what’s the difference between hire purchase and personal contract purchase? Let’s find out!
How Does Car Finance Work?
When you finance a car, you are borrowing money from a lender so you can buy the car you want. Typically, there is an upfront cost which is either an “initial rental” or a deposit. Some lenders offer zero deposit car financing too.
Once you’ve been approved to get car finance, you have to pay back the loan over a certain period through monthly payments. Usually, this will be 12, 24, 36, or 48 months, depending on what you’re comfortable with and what has been agreed upon between you and the lender.
There are a few factors that affect the amount you need to pay every month. The amount of your deposit, as well as the number of months in your contract, determine the amount. In addition to that you need to pay interest on the borrowing - this interest rate is usually fixed throughout the term of the loan.
It might help you to look at the annual percentage rate or APR for different car finance deals, then you can compare which ones have the lowest and most affordable borrowing rates.
Now that we know the general idea of how car finance works, let’s take a look at two main types of car finance: hire purchase and personal contract purchase.
Hire purchase car finance calculates the cost of a vehicle so it can be divided by the number of months agreed upon in your contract. When you pay a deposit, then that amount will be subtracted from the total amount you’re going to borrow. The bigger the deposit, the lower the monthly payments.
You can get hire purchase deals for brand new vehicles and also for secondhand cars. A major advantage of hire purchase car finance is that once you’re done paying off the loan, the car is yours. You don’t have to pay for anything else.
This type of loan is secured against the vehicle. By that, it means that the car acts as collateral in case you miss payments. If the borrower stops paying altogether, the lender can repossess the vehicle to cover the cost. That’s why it’s important to always pay on time.
Hire purchase is the best option to finance a car if you want to own the vehicle outright but you want the cost to be spread over a set number of months to make it more affordable for you. This is great for those who know they really want to own the car by the end of their contract term.
Personal Contract Purchase
If you’re looking for more flexibility when it comes to car finance, maybe a personal contract purchase deal is better for you. The monthly repayments are lower than that of a hire purchase deal, since you’re not paying for the full price of the vehicle. Instead, what you’re paying off is the car’s predicted depreciation for the duration of your contract.
Just like hire purchase, you need a deposit if you want lower monthly payments. By the end of your contract, you have the option to return the car or buy the car by paying an optional final payment. If you want to return the vehicle, you won’t have to pay anything else unless the car has incurred some damage or it has exceeded the pre-agreed mileage limits.
Personal contract purchase is better for car buyers who are not sure about whether they finally want to own the vehicle, or maybe only need the car for a few years. At the end of your contract term, you may choose to pay the final balloon payment and the car will be yours. If you’ve decided that you’d rather not keep the car, then you only have to return it to the lender.
Whether you choose hire purchase or personal contract purchase, make sure that it fits your financial situation, and think whether you want to own the car or have the flexibility to return it at the end of your contract.
Want to learn more about how car finance works? You can use the Carmoola car finance calculator to get an idea of how much your monthly payments will be when you borrow a certain amount. Remember that this will only be an estimate and the actual amount might be different. Nonetheless, it will help you in budgeting your finances.
To know how Carmoola can help you buy your dream car, be sure to read more here! 🚗