New cars can be expensive, which is why some drivers choose to pay for them on credit. There are a few ways you can go about this, and two you may have heard of are hire purchase agreements and leasing.
So what’s the difference between these two options? Read on to learn more.
Hire purchase agreement
A hire purchase agreement (HPA) lets you pay for the vehicle in instalments but use it right away. As many new cars cost tens of thousands of pounds, a HPA can be among the only ways some people can afford to buy one.
Under a hire purchase agreement, you pay a deposit for the new car – typically 10% of the value of the motor – and then make a fixed payment once a month until the outstanding balance is paid off. Once this last payment has been made, you own the vehicle.
It’s possible to buy either a brand new or used car under a HPA. Once you’ve paid the deposit, you’re then free to drive your new car away. However, you’ll need to keep up with your monthly repayments, as until you’ve made the last once you don’t technically own the car. If you fall behind with your payments, your HPA provider has the right to repossess the vehicle from you.
Leasing a car is far more similar to renting than is the case with HPA. Rather than paying the balance of the cost of your car gradually, as is the case with HPA, your monthly payments on a vehicle lease cover hiring the vehicle and extras like maintenance and tax (depending on your own agreement), in addition to the depreciation of the vehicle.
Your two main leasing options are personal contract purchase (PCP) and personal contract hire (PCH). PCP gives you the option of either returning the vehicle or buying it using what is known as a ‘balloon payment’ at the end of the lease. PCH does not give you this option.
When you lease a car, you’ll most likely have to agree to stick to a certain mileage and to return the vehicle in the state in which you got it. If you don’t, you could end up with an extra bill at the end of your agreement.
These aren’t your only two options when it comes to financing a car; you could consider taking out finance with the dealer you’re buying the car from, or shop around for a personal loan. And if you have the money available, you could buy the vehicle outright, although you’re unlikely to be able to spread the cost out if you do this.
Yes, we’re throwing another term at you! However, a logbook loan is a completely different beast to the two finance options we’ve talked about above.
A logbook loan is a type of secured loan, in that the money you borrow is secured against your car. If you fail to pay back what you’ve borrowed, the lender has the right to sell the car to get the money back – after all, they technically own it until you’ve cleared your debt.
Logbook loans can be a very expensive way to borrow as the APR is often much higher than on other forms of credit. On top of this, the industry is not subject to the close regulation that some other parts of the financial sector are, which may make you wary of taking out the loan.