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The complete guide to personal car leasing & finance options.

9th April 2019

A straight forward explanation of the different forms of personal car finance options, how they work and top tips to consider for each.

9th April 2019

Leasetree: Making car finance easy to understand!

Leasetree makes it easy for you to understand the different types of finance, their advantages and challenges.  We explain how each form of car finance works and we strip away the jargon so you can be sure you are getting the car/van lease or finance deal that suits you and your needs.

First up, the most common form of vehicle finance in the UK, the Personal Contract Purchase Plan – often called “PCP” which is a very flexible plan. At the end of the contract, you can simply hand the car back or you can choose to keep it by paying the balance off, often called a “balloon payment”. Alternatively, you can settle your contract early and get into a brand new deal.

Another common form of finance is Personal Contract Hire, also known as “PCH” where you can fix the cost of motor leasing over a defined period (normally 2 to 4 years) but you never own the vehicle.

Hire Purchase or “HP” and Conditional Sale are very similar to each other. You have full use of the vehicle for the term of the agreement, the car or van is registered in your name and you will own the vehicle once all the repayments are made, free to keep or sell the car on as you like.

At Leasetree we bring you a variety of lease and finance options through our lease partners and our access to 19 leading lenders and we offer all of these types of finance. You can find out more about each form of finance, their advantages and things you should consider by clicking on the headlines of each below to get a more in-depth explanation.

How PCP works :

Personal Contract Purchase Plans (PCP) work where the finance company guarantees what the vehicle will be worth at the end of this agreed period (normally 2 to 4 years) provided you have kept the vehicle in reasonable condition and have not exceeded the agreed mileage.

In some cases, the vehicle might actually be worth more than the Guaranteed Minimum Value set by the lender in which case you could use whatever value is in the car to put towards your next one. If the car has dents or scrapes – more than normal wear and tear, it’s likely that the car will be worth less than the “Guaranteed” Value as the contract typically assumes normal wear and tear only.

If you have exceeded the agreed Mileage, there will be a cost for this which is set up front in the contract and can vary considerably (as low as 5 pence per mile or as high as 50 pence per mile) and is charged per mile exceeded.

PCP is technically not a lease agreement, but the term “PCP Lease” is often used where consumers are increasingly simply handing back the car at the end of the contract period rather than paying the optional balloon payment and see themselves as “leasing” the car.

PCP contracts often have the option to add a maintenance package which can include the likes of tyre replacement, regular services and even breakdown recovery making the PCP option even more attractive and user friendly.

Depending on the type of vehicle and your credit rating you may even be able to get “zero deposit deals” on PCP which means that you don’t need to make a down payment deposit on the vehicle which is also a useful plus.

PCP is a very flexible funding option as you can choose if you want to:

  • Simply hand back the vehicle at the end of the contract.
  • Keep the vehicle, by paying off the “balloon payment” which is the amount still left to pay on the car – effectively buying the car outright. You can even refinance this “balloon payment” amount in most cases either through the original lender or by using an alternative lender to pay off the balloon payment and then by starting a new payment plan with the new lender.
  • Hand the vehicle back and if it’s worth more than the guaranteed amount originally allowed for, you can take the cash or put it towards the deposit for a new deal.
  • Settle early – it is possible to settle early, but it’s unlikely that you will have equity in the vehicle unless you are near the end of the agreed term because of how PCP is set up and you will most likely have to pay for doing so. It is likely that you will be contacted prior to the end of your PCP term (normally in the final third of the agreement) with an offer to get into a new vehicle on PCP but because of the potential negative equity in the original vehicle you may find that the new deal is more expensive than it would otherwise. This is not always bad news however as, if you play your cards right, you can use the fact that the company wants you to swop vehicles early to secure a good deal on the new lease deal.

Top tips for PCP: Done right, PCP can be a very good way to finance a vehicle and is a very popular way to do this, but you shouldn’t be tempted to underestimate your annual mileage and check the excess mileage charge as it can vary considerably from as low as 5 pence per mile to as high as 30-50 pence or in rare cases, even higher.

Also, if you are considering a settlement or an upgrade on a car leasing deal, make sure that you ask the lender for a breakdown of the current value of the vehicle and what you have paid off so you understand exactly how much negative equity you will need to pay off as this will most likely be reflected in the new deal.

Lastly, if you are considering ending the PCP contract early and you have been contacted with an offer to get into a new car – don’t be shy to ask for a better deal – after all, it’s a 2-way street and you are in the driving seat!

How PCH works :

Personal Contract Hire is the purest form of leasing and it’s easy to budget for in that you know exactly what the monthly payments are, they never change throughout the agreed term. At the end of the contract lease period, normally 2 to 4 years- though sometimes as low as 3 months -you must hand back the vehicle as it is never yours to keep.

PCH normally involves putting down a deposit which depends on the type of vehicle, how it holds value over time, often called its residual value, and the length of the agreement.

Top tips for PCH: To get a feel for the PCH deal and to compare deals accurately, multiply the monthly payments by the term of the agreement (number of months), add the deposit figure and any fees so you can get a total figure to compare deals. Some companies reduce the deposit but increase the monthly payments and others increase the required deposit but lower the monthly payment. This way, you are comparing apples with apples and will be in the best position to negotiate the best deal.

How HP and Conditional Sale work :

Hire Purchase and Conditional Sale agreements are very similar. You agree a sum of money which will be borrowed and the interest/APR charged over a certain period, normally 2 to 5 years from the lender.  The monthly repayments are the same for the duration of the contract. The vehicle is registered in your name but you will not own the vehicle until all the repayments are made and the total amount paid off.

You can settle the agreement early by paying off what is owed and once you have either paid all the payments or, settled early, the vehicle is yours.

The only difference between a conditional sale and hire purchase is that there is a fee (often small) to cover transfer costs at the end of the agreement for Hire Purchase but with Conditional Sale, there is no fee.

Top tips for Hire Purchase and Conditional Sale: Don’t just accept the first offer you get from a dealer. Car dealers often only have arrangements with a limited number of finance companies. You can get your finance from wherever you like so be sure to get a cash price for the vehicle as well as the finance quote you are likely to get from a dealer.

Use a well-regarded comparison site like Leasetree (which is also free to use) with its access to lease brokers and 19 lenders to get the best deal/APR for you whether your credit rating is pristine or not. Also, use a site that has multiple forms of finance available so you get both the vehicle and the finance deal that’s right for you, whatever your circumstances.

Choice and Size matter when it comes to car and van finance

Whatever form of finance is right for you, Leasetree only deals with partners that offer a wide variety of finance types, have access to a wide range of lenders and only use soft search in the first instance to confirm if customers will qualify for finance.

Naturally, our partners also have the cars and vans (new, nearly new and used) to go along with the car lease and finance offers. If you prefer to find a car yourself, from an established dealer, we can also just organise the finance for you– putting you in control, whatever finance choice suits you!

A very wide choice of cars and finance options on one site!

So, how do you get a lease of finance deal?

Leasetree…it’s as easy as 1,2, Tree