Finance Explained

Here at Hutton Bros we understand that buying a car can be a daunting prospect, especially when faced with the endless amounts of financial jargon that can make your head spin.

Below you’ll find a useful guide to the different types of credit available and the terminology often found with most financial agreements.

Hire Purchase (HP) – Current terms are for 24-60 Months, cars and commercials up to 7.5 tonnne and maximum of 13 Years at the end of the term.

If you choose to buy your Volvo from Hutton Bros using a Hire Purchase agreement, you will normally pay an initial deposit and then pay off the entire amount of the car in the form of regular monthly instalments. When all the payments are made, the Hire Purchase agreement ends and you own the car. Hooray!

The best bits:

You’ll be able to drive away a car that you may not have managed to buy outright.
Unlike a PCP contract, you won’t need to estimate your mileage at the start of your Hire Purchase agreement, so you’ll avoid excess mileage charges.
You will own the car once the last payment has been made.

The not so good bits:

Monthly payments may be higher than other finance options, such as PCP, as you’re paying off the full value of the car.
You must settle the financial agreement in full if you want to sell it.

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Lease Purchase (LP) – Current terms are for 24-48 +1 Months. Maximum of 9 Years at the end of the term.

Lease Purchase (LP) is very similar to a (PCP) agreement You lease the car for an agreed period of time by making fixed monthly payments. When the contract expires, you pay a baloon payment to own the car outright.

The best bits:

Lease purchase is ideal for companies that want to retain the vehicle as an asset.
Payments are typically cheaper than hire purchase.

The not so good bits:

There is no return option unlike PCP, meaning you must agree to buy the car.

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Personal Contract Purchase (PCP) – Current terms are for 24-60 Months. Maximum of 5 Years at the start of the term

Personal Contract Purchase (PCP) is similar to a Lease Purchase agreement as you will usually pay an initial deposit, followed by monthly instalments.

What’s different with PCP, is that your monthly instalments are only paying off the depreciation of the car, rather than the entire value of the car.

How does PCP work?

At the start of your PCP contract, a Guaranteed Future Value (GFV) of the car is estimated. This is the car’s expected value when your contract ends.

For you, this simply means that the money you’re actually borrowing and repaying is the difference between what the car is worth now, and what it will be worth at the end of your contract (the depreciation). You’ll pay this difference off in monthly instalments.

This means lower monthly payments for you, but you will need to pay a final payment at the end (the Guaranteed Future Value) if you want to buy the car.

Once your monthly payments are finished, you have these options:
1. Buy the car by paying the final balloon payment (the Guaranteed Future Value)
2. Hand the car back – your finance company has already predicted the Guaranteed Future Value of the car, so handing the car back will settle the deal.
3. Part exchange for a new car

The best bits:

Monthly payments on a car financed by PCP are usually lower than if your car is financed by a Hire Purchase agreement.
If you decide not to buy the car, you can simply walk away when you’ve made all the monthly payments.
If your car is worth more than the Guaranteed Future Value then you can use that equity towards a deposit on a new car.

The not so good bits:

If you want to buy the car you will need to pay your final balloon payment (the Guaranteed Future Value).
You will need to agree on an approximate mileage estimate at the beginning of your contract. (watch for hefty penalty charges for excess mileage)

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Negative equity Loan (NEL) – Current terms are for 24-60 Months. Maximun age at the end of the agreement is 10 Years

Sometimes you may find that the current car you are driving is worth less than the amount you already have financed against it. This is what’s known as negative equity.

A negative equity loan allows you to re-finance your existing debt from your current car into a new finance deal and settle your outstanding debt.

The best bits:

Even if you owe more on the finance agreement than the value of your car, it allows you to roll your current loan into a new one.

The not so good bits:

Generally the APR rates are not as good for Negative Equity Loans

Which finance option should I choose?

It depends what you’re looking for. If you’re someone who likes to change their car every three years, and you’re looking for low monthly payments then a PCP or LP deal might suit you.

If you want to own your car at the end of your monthly payments without paying a final lump sum, then a Hire Purchase deal might be a better fit.

*APR (annual percentage rate) – Use this figure to compare the value of agreements. It is the cost of a loan as a yearly rate over its full term. Remember to translate that percentage rate into cash terms so you know exactly how much interest you are paying.

*Balloon Payment – A deferred lump sum, payable at the end of the payment term. Taking this option means monthly payments are greatly reduced. Found in PCP and hire purchase agreements.

*Credit agreement – The contract between the borrower and lender. You get the car, and agree to pay for it over a set period of time.

*Credit rating/credit history/credit record – This is information held by institutions as a record of your financial dealings. It has details of current loans, loans you’ve had previously and how you’ve managed finances in the past. You will be scored based on this information, and financial organisations will use the score to decide if you should get credit, and if so, how much to give you. It can also be used to determine APR rates for a credit agreement.

*Depreciation – The amount your car has decreased in value over the time you’ve owned it, because of mileage, wear-and-tear and ageing.

*Equity – The positive difference between the value of your car and the amount outstanding on the finance used to buy it.

*Flat rate – The monthly interest rate charged on the amount borrowed over the term. Does not include any reductions as you pay the loan off, so is not an accurate way of comparing loans. Do not confuse with APR.

*Fixed rate – The rate of interest will remain the same right through the credit agreement, regardless of what happens to base rates.

*GAP (guaranteed asset protection) insurance – Covers you against any shortfall in payment should you write your car off or have it stolen while still paying for finance.

*Minimum guaranteed future value (MGFV) – This is the very lowest amount your car is guaranteed to be worth at the end of your finance agreement. In PCPs, this is the amount (minus your deposit) that you pay as the balloon payment at the end of the term.

*Negative equity – Owing more on the finance agreement than the value of your car.

*Part exchange – When you use your existing car as part-payment for a new one.

*Payment protection – Insurance cover that pays your finance for you if you are ill, injured or unemployed.

*Residual value – the amount your used car is worth after wear-and-tear, mileage and general car condition is taken into account.