There are four mainstream finance options when buying or leasing a new car

PCH or Car Leasing

Personal Contract Hire (PCH) or personal car leasing is a long-term contract in which you lease a vehicle for a set period of time. This is usually between 2, 3 or 4 years.

An initial payment or a deposit has to be made at the start of the lease, this is followed by fixed monthly installments. Once the agreed period is over, you just have to hand back the keys. With this finance option, you’re just paying off the depreciation value.

Car leasing would be the best option for you if when you're focused on affordability, value for money and happy to return the vehicle at the end of the lease.

Advantages

  • Compared to Hire Purchase (HP) Personal Loan (PL) there is a significantly reduced upfront payment
  • Compared to HP and PL, monthly payments are typically lower when leasing
  • Road tax is taken care of for you for the duration of the lease
  • Generally you can lease a higher specification of vehicle for your money
  • You can drive the latest model with the latest specifications without having to buy it

Points to note

  • There is no option to buy the vehicle as you are not the owner
  • Exceeding the annual mileage may incur more charges
  • If you terminate the lease early, you may have to pay a fee
  • The vehicle has to be maintained, in line with fair wear and tear policies.

Personal Contract Purchase

With Personal Contract Purchase (PCP) gives you three options, you can return the vehicle, you can purchase it, or you can use it as part exchange for a new vehicle.

PCP is a long-term rental agreement. Similar to PCH, you have to make an initial payment followed by fixed monthly payments. If you decide to keep the car at the end of the contract, you will also have to make a final payment that will cover the full remaining value of the car, often called a balloon payment.

With PCP, you are effectivly paying the vehicle's depreciation value as well as the interest calculated on the total value of the vehicle. If you decide to purchase the vehicle, then you’ll also be paying the Guaranteed Future Value (GFV) of the vehicle, which in some cases may be more than the actual value of the vehicle.

Advantages

  • There is an option to purchase the vehicle at the end of the period for a pre-agreed amount
  • A smaller deposit is required, as compared to Hire Purchase
  • If the GFV is lower than the vehicle’s value at the end of the contract, you can either use that towards another vehicle or keep the difference

Points to note

  • Road tax is only provided for the first 12 months
  • Interest has to be paid on the total value of the vehicle even if you don’t purchase it
  • The car has to be maintained until the contract ends or the entire value has been paid off
  • You cannot sell the vehcile until the contract is paid off, unless you settle the outstanding amount finance first, including the balloon payment
  • If you wish to sell the vehicle, then you will have to settle the outstanding finance. This is usually greater than the value of the vehcile, leaving you with negative equity
  • You will incur charges if you exceed your annual mileage

Hire Purchase

In this type of arrangement, you purchase a vehicle by making an initial deposit followed by monthly payments that continue for between 1-5 years. When the vehicle is paid in full, it is yours to keep.

In Hire Purchase, you are simply hiring a vehicle until the final payment. When the final payment is done, you become the owner.

Advantages

  • No need to estimate mileage
  • You own the vehicle once the final payment is made

Points to note

  • The full value of the vehicle has to be paid, making it expensive more than PCP and PCH
  • You only ownb the vehicle after all payments have been made, which can be anything up to 5 years
  • The car must be maintained and regularly serviced at your cost for the duration of the agreement
  • Until at least a third of the total amount of the vehicle has been paid, the finance company can repossess the vehicle without a court order
  • You can’t sell the vehicle till it is yours at the end of the term

Loan

A personal loan is a loan taken from a bank with a fixed or varied rate of interest for an agreed term. Any loan must be repaid in full regardless of whether you sell the car or not.

Advantages

  • You own the vehicle and can sell the vehicle at any time, but you have to continue to pay the term on the loan
  • You can sell the vehicle at any time but don't neccessarily have to repay the loan at the time you sell the vehicle

Points to note

  • The repayment of the loan is significantly higher than car leasing (PCH) or PCP as you will have borrowed the full value of the vehicle and will therefore be paying interest on the total amount of the loan
  • If you sell the vehcile or it is damaged beyond economical repair (written off) then you may owe more than the projected sale price or the price given by the insurance company