All you need to know about car finance.

3rd May 2018

Car finance can be mind boggling. With a variety of options, and a list of variable options within them. It can result in a difficult time deciding what finance deal will fetch the most bang for your buck.

The options

There are several options available to you when looking for a finance deal for your car. Finance offers are very flexible and can be adjusted to your preference We're about to breakdown the three types of finance offers available to you. Finance options can also vary in duration, most commonly ranging between 3-5 year agreements. When taking out a finance deal on a car, you are borrowing the full cost of the car and you pay back that cost throughout the finance agreement.

PCP

Personal Contract Purchase is the most common finance offer and often the most flexible. The payments are spread out out between the deposit, monthly payments and the optional final payment. The amount of money you put into each factor is up to you.

Deposit: The deposit is the initial figure you pay as the first payment, this often acts as the first month of payments throughout the agreement.

Monthly payments: The monthly payments are made every calendar month after the deposit, and are a fixed payment.

Optional final payments: The optional final payment is unique to PCP deals. Once the monthly payments have been paid for the duration of the agreement you are given two options:

- Return the Vehicle and drop the optional final payment

- Purchase the vehicle and pay the optional final payment

PCP Example

This is a table displaying all of the factors included with a finance quote, this particular example is for a New Ford Fiesta Zetec. Let's break it down.

Deposit

£1000

Monthly Payments

£256.71

Number of monthly Payment

36

Finance Term

37

Ford Contribution

£0.00

Amount of credit

£14,795.00

Total interest charges*

£378.53

Total amount payable

£16,173.53

Optional final payment

£5,912.00

Miles per annum

9000

Excess mileage charge (pence per mile)

7.2

Fixed borrowing rate

0.81%

APR representative

1.20%

Deposit: The value of the initial deposit.

Monthly payments: The value of the fixed monthly payments.

Number of monthly payments: The number of consecutive calendar months that the monthly payments will be paid.

Finance term: The number of consecutive calendar months that total the duration of the finance agreement. This is usually the number of monthly payments plus one month to cover the deposit.

Ford Contribution: Manufacturers and dealerships can sometimes contribute to your payment during special offers.

Amount of credit: This is the total cost left to buy the car after you've paid the deposit, but also before calculating the interest of borrowing that money.

Total interest charges: The total interest charges is the interest you pay on the amount of credit for the car. The (*) highlights that Ford charge £20 for facility fee's too.

Total amount payable: The total amount payable is the overall sum of the costs of the car. You can check this yourself by calculating the following: Deposit + (Monthly payments x Number of monthly payments) + Optional final payment + Facility fees.

Optional final payment: The value of the optional final payment.

Miles per annum: The value of miles you can drive the vehicle annually throughout the agreement.

Excess mileage charge (pence per mile): The cost, in pence, of each mile you clock over the Miles per annum

Fixed borrowing rate: The rate of interest

APR representative: The annual percentage rate. This value is based on your credit rating and the amount of credit taken out on the contract. Adjusting the deposit and number of monthly payments can affect the APR.

Now that's what makes up a Person Contract Purchase offer. Once you understand PCP, the other finance options are not much different.

PCH

A Personal Contract Hire is best for those who are certain they want to return the vehicle once the contract has expired.

Just like a Personal Contract Purchase, you can adjust your deposit and monthly payments to your personal preference. Instead of an optional final payment, the decision to return the vehicle is made at the start of the contract. Using this option can often make it easier to swap contract to different cars easily.

HP

A Hire Purchase is best for those who are certain they want to own the vehicle once the contract has expired.

Just like a Personal Contract Purchase, you can adjust your deposit and monthly payments to your personal preference. Instead of an optional final payment, the decision to keep the vehicle is made at the start of the contract. The deposit and monthly payments will have to increase to make up for the fact that there is no final payment, but once the final monthly payment is made you will own the car.

Adjustments

With most contracts, you can put down extra payments throughout the contract if you wish to. Making an payment will result in the contract being re-calculated to reduce the cost of the monthly payments and optional final payment. If you make a large enough payment you can pay off the whole contract if you wish to.

One factor that can adjust the deposit and monthly payments is the duration of the contract. A shorter contract will require you to pay off the credit taken out to purchase the car sooner. Therefore the figure for the deposit and/or monthly payments will increase. Similarly you can take out a longer contract and the figures will decrease as there are more payments made. The APR is often adjusted depending on the time it takes to pay back the credit.

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