Car Finance for Used Cars: A Definitive Guide

Published: 8 November 2022
Categories:

Regardless of how you fund it, committing to a used car is a big investment, but thankfully, it doesn’t need to be paid for all at once. The popularity of used car finance means that it’s the norm to pay monthly for your next set of wheels, enabling you to drive the car you want affordably - it's a solution we offer here at Wilsons Epsom!

There are several options when it comes to spreading the cost of a used car, and it’s important to understand which is the best route for you to go down, taking into account your lifestyle, what you can afford, and how you approach car ownership.

In this article, we’re going to explore the different types of used car finance, what the advantages and disadvantages are of each option, and explain some of the jargon you might come across on your car finance journey.

Personal Contract Purchase (PCP)

What is Personal Contract Purchase?

A popular used car finance option and one you may even have already come across is the Personal Contract Purchase (PCP). It will usually see you pay an initial deposit, followed by monthly repayments. Once your agreed contract term has ended, the monthly installments will stop, and you’ll have the option of buying the car.

How does Personal Contract Purchase work?

Taking out PCP can be broken down into three stages:

Step 1 - Putting down a deposit

The larger your deposit is, the less you’ll have to pay back over your monthly installments.

Step 2 - Understanding the amount you’ll be borrowing

The amount is determined by how much the car will depreciate in value over the contract term, minus the deposit you've paid. This will then be paid off in monthly installments, plus any interest.

Step 3 - Deciding what to do at the end of the term

Once you have come to the end of the term, you will be presented with three options:

Making the car yours by paying the balloon payment. The balloon payment is the remaining balance agreed on at the beginning of the deal, and once cleared, the car is yours.
Hand the car back with nothing more to pay, subject to any additional charges (for example, if there is damage, or the mileage limit has been exceeded).
Part exchange the car (subject to settling any of your existing finance agreement) and start a new deal on a new car (subject to status).

What are the advantages and disadvantages of a Personal Contract Purchase agreement?

Advantages	Disadvantages
You could get behind the wheel of a newer, more expensive used car for a lower fixed monthly payment than a hire purchase agreement, or taking out a personal loan yourself.	For the contract period, you won’t own the car - therefore if you don’t keep up with monthly payments, your vehicle is at risk of repossession.
PCP is ideal if you’re flexible about car ownership, as how the agreement ends can fit in with your personal circumstances.	There is a large amount to pay at the end of the term if you’re in love with the car and want to keep it.
Protects against depreciation, as a future value guarantees equity.	A mileage limit adds £’s to the bill at the end of the deal if it’s exceeded; if you’re on the road a lot, bear this in mind!
	The future value is only guaranteed so long as the car is kept in good condition - any damages beyond normal wear and tear will incur charges.

Hire Purchase (HP)

What is Hire Purchase?

Similar to a Personal Contract Purchase, a Hire Purchase agreement (HP), sees you pay a deposit on a new or used car with a view to paying off the rest of its value over a series of monthly installments. Unlike PCP, though, you will own the car at the end of a Hire Purchase agreement, and the loan is secured against the car, with the vehicle being used as collateral.

How does Hire Purchase work?

Step 1 - Putting down a deposit

Again, the more money you put down here, the less you’ll have to pay back over the term length.

Step 2 - Choose your monthly payments

Here is where affordability comes in; what you can afford each month will determine how long you’ll be paying off the value of the car minus your deposit.

Step 3 - Arriving at the end of the term

The car is yours! This is where you take full ownership of the vehicle. Or, if you fancy an upgrade, you can part exchange it for a different model.

What are the advantages and disadvantages of a Hire Purchase agreement?

Advantages	Disadvantages
You own the car at the end of the term.	The car isn’t yours to own until you've made the final payment.
You can choose repayment terms from one to five years.	Monthly payments tend to be higher than PCP and leasing deals.
You may be able to get a hire purchase deal where no deposit is required, or you may be eligible for a dealer deposit contribution.	You won’t be able to sell or modify the car throughout the term without the permission of the finance company.
You know exactly what you're paying every month for the duration of the agreement thanks to fixed interest rates.	The finance company can repossess the car if you fail to keep up with payments

Lease Purchase (LP)

What is a Lease Purchase?

A lease purchase (LP) is a more affordable way to finance a car in the short term by allowing you to lease a car for an agreed period of time, committing to paying a balloon payment at the end in order to make the car yours.

How does a Lease Purchase work?

An advance payment is put down first, followed by monthly payments over an agreed term. Similar to a PCP agreement, a balloon payment is due at the end of the term, which makes the monthly payments cheaper in general. However, unlike a PCP agreement, this balloon payment is one that you must make or refinance; with a PCP agreement, it’s optional.

What are the advantages and disadvantages of a Lease Purchase?

Advantages	Disadvantages
Cheaper monthly payments.	A commitment to make funds available by the end of the term.
You’ll own the car once the balloon payment is made.	There is no option to return the vehicle.
You can save money towards the balloon payment throughout the term.	The value of the balloon payment could be higher than expected at the end of the term, depending on the market conditions.
Flexible term lengths.

Personal Contract Hire (PCH)

What is Personal Contract Hire?

With a Personal Contract Hire (PCH), you essentially pay monthly to use the car. This is a long-term rental agreement for private motorists, designed to combat depreciation.

How does Personal Contract Hire work?

The amount you pay over a PCH agreement term is determined by what the car will be worth at the end of it, and by the estimated annual mileage. The PCH company will deduct the estimated residual value from the retail price of the car. You will then pay the difference in fixed monthly installments.

A deposit is paid upfront (usually between three to six times the monthly payments) and you’re good to go! It’s important to note that there is no option to own the car at the end of the term - you are simply paying monthly for the use of it.

What are the advantages and disadvantages of Personal Contract Hire?

Advantages	Disadvantages
There is often the option of a maintenance package to include in the rental payment.	Falling in love isn’t an option; you won't ever own the car, and there’s no option to purchase it.
A PCH is likely to have lower deposit amounts and fixed monthly payments.	If you exceed the agreed mileage or damage the car beyond normal wear and tear, you will incur charges.
You’re under no obligation to own the vehicle at the end of the term.	If the car is written off and the insurer's value is less than the leasing company's, you may find yourself liable for the difference.

Business Contract Hire (BCH)

What is Business Contract Hire?

Business Contract Hire (BCH) is very similar to the Personal Contract Hire, but these agreements are exclusively for businesses. They enable businesses to lease cars for their employees, though they are owned by the lease company throughout the agreement length, and ownership is not an option for either the business or the employee.

How does Business Contract Hire work?

In much the same way as PCH, the monthly amount paid by the business is determined by what the car will be worth at the end of the term, and by the estimated annual mileage the car will be covering. The lease company deducts the estimated residual value from the retail price of the car, and the business then pays the difference in fixed monthly installments.

For VAT-registered companies, a BCH means that they can claim back 50% of the VAT on the finance element.

What are the advantages and disadvantages of Business Contract Hire?

Advantages	Disadvantages
Businesses are able to reclaim a portion of the VAT paid on rental fees.	The business or employee won't ever own the car.
Service costs can be included in the monthly payment.	If the agreed mileage is exceeded or there is damage to the car beyond normal wear and tear, it will incur charges.
No commitment to purchase the vehicle outright is necessary.	If the car is written off and the insurer's value is less than the leasing company's, the business may find itself liable for the difference.
Initial payments and fixed rental fees tend to be lower.
Frees up capital that would otherwise be invested in depreciating cars.

How does your credit score affect car finance?

Success in applying for any kind loan usually depends on your credit score, and whilst finance is possible even with bad credit, it’s best to keep your credit score as healthy as possible.

Your credit score is an indication to lenders of how you approach your finances. A healthy score indicates that you’re a dependable choice, and not a liability to lend money to, and this will then open you up to a wider choice of lenders and deals available.

Prior to going down the car finance road, we’d recommend finding out where your credit score currently stands, and how to improve it if there’s room to do so.

Car finance jargon - Wilsons' breaks it down

In your car finance journey, you may come across some terms that it’s a good idea to become familiar with in order to understand everything properly. Those terms include:

Agreement term	This is the length of time you pay money to a finance or hire company.
Balloon payment	This is an outstanding sum due when monthly payments are complete, agreed at the start of the term.
Credit agreement	This is a legally binding financial contract, outlining all the terms and conditions that come with borrowing money.
Credit history	This refers to the debts you’ve repaid in the past.
Equity	Equity is the value of an asset.
Part exchange	In motoring terms, it means using your existing car as part payment for a newer model.
Residual value	This is what an asset is worth at the end of a term.
Variable rate	Interest rates change depending on the economic conditions; an agreement with a variable rate will have interest that fluctuates in accordance with these changes.

Car finance for used cars at Wilsons Epsom

As one of the largest dealerships in Southern England, we at Wilsons Epsom are proud to provide hundreds of quality used cars from some of the biggest and best manufacturers in the world. To help make your purchase more affordable, we offer a variety of competitive finance options designed to help you fit the cost of your next car into your finances. Our team’s knowledge combined with the access we have to trusted lenders, means you’re in safe hands when it comes to car finance.

Find out more about the used car finance solutions we offer at Wilsons in Epsom and start shopping for your next used car today - we have a huge range available online.