September 1st is set to be a busy day for car dealerships across the UK, as the 65-reg plate receives its nationwide release and drivers look to purchase a brand new vehicle. It is not just the many different types of cars that you will need to choose between if you’re one of those looking for a fresh set of wheels though; there are various vehicle finance options available too.
Fortunately, leading VW retailer Inchcape Volkswagen has put together this guide of the six common forms of vehicle finance to ensure you know what each one entails ahead of a discussion with a car salesman:
Personal contract hire
Personal contract hire (PCH for short) follows a structure that is very easy to understand. Once you have selected your car, you make a low initial payment and then set up a fixed monthly payment plan over a lease period that is agreed beforehand.
When this lease period draws to a close, you hand the car back to the dealership and walk away free of any further commitments — bear in mind that you can never own the vehicle where a PCH is concerned.
Also, be aware that at the end of an agreement, you may have to pay an additional fee to cover the costs of any wear and tear beyond what the dealership would consider reasonable. A further charge could be applied if you went over the monthly mileage limit that will be agreed at the start of the term.
Take out a finance lease on your new vehicle and you will be able to enjoy a minimal outlay as well as receive maximum tax efficiency. This option also comes with a number of rental patterns, to the point where there is sure to be one that fits with your current cash flow.
When the lease period ends, a final balloon payment needs to be made. The vehicle you have been driving will be sold in an attempt to make up the amount to be paid, however if this isn’t enough then you will need to pay the remaining balance.
The last of the entirely non-ownership options, contract hire sees you being able to enjoy a brand new car on a fully inclusive basis and then simply handing it back to the dealership once the contract expires.
One word of caution where a contract hire is concerned though is that you will be restricted to a mileage limit which will be clearly outlined to you at the start. Fail to keep below that limit and you will have to pay an additional charge, so a bit of forward planning is strongly encouraged before putting pen to paper.
Hire purchase is a lot like the PCH option discussed earlier, in that you begin by putting down an initial deposit and then make monthly payments over a length of time that is agreed by you and the dealership.
However, with hire purchase you don’t hand back the car at the end of an agreed period. This time, once the last payment has been made you become the owner of the vehicle. Of course, the lack of a balloon payment does mean that either the monthly instalments will be larger than many of the other options discussed in this guide or the duration of the agreement will be longer.
As well as having similar names, a hire purchase and a lease purchase follow the same pattern all the way up to the end of the payment period. Therefore, you will still have a deposit to pay and then make fixed monthly payments for an agreed period of time.
However, once the final instalment has been paid on a lease purchase agreement you will have to cover the costs of one last balloon payment before you can claim full ownership of your vehicle. It is important that drivers don’t forget that this is here, which can be easy to do if an agreement runs over a number of years.
Personal contract purchase
Also called PCP, there is a lot of options available when it comes to a personal contract purchase agreement.
For one, the size of your fixed monthly payments over the agreed lease period will be determined by how much you put down as a deposit — this could be cash or the sum of putting an old vehicle through a part-exchange.
At the end of a PCP agreement, you will be presented with a further three options. One, you make a final balloon payment and take ownership of the vehicle. Two, you swap your car and take out a new agreement on a new vehicle. Three, you return the car to its manufacturer and walk away with no further commitments.