Understanding Your Car Finance Options | AMT Auto

This handy guide has been put together to give you an overview of the different ways you can finance your car purchase with AMT Auto. We cover a summary of how each finance option works, plus the features, benefits and further considerations for each type of finance arrangement.

A good credit score is crucial in securing better rates and acceptance for car finance. We’ve provided a summary of each finance option so you can make an informed choice.

What is Car Finance?

Car finance is a type of loan that allows you to borrow money to purchase a car and pay it back over time.

Most people don’t have enough money to pay for a car upfront, so car finance provides an alternative. Car finance involves borrowing money from a lender and making monthly payments, usually with interest. The lender will assess your credit history and credit rating to determine your creditworthiness and the interest rate you’ll be charged.

Types of Car Finance

There are three main types of car finance available. All three are differing versions of what is known as a ‘conditional sale’.

They are:

Personal Contract Purchase (PCP): PCP is a flexible finance option that involves paying an initial deposit, followed by monthly payments, and an optional final payment.
Hire Purchase (HP): HP is a type of car finance that involves paying a deposit upfront, followed by monthly payments to pay off the remaining balance, plus interest and fees.
Lease Purchase (LP): A type of car finance that allows you to use a car for a set period of time in exchange for monthly payments.

Personal Contract Purchase (PCP)

We find that this is the most popular finance agreement with our customers. With a personal contract purchase you pay an agreed amount each month, then at the end of the contract you have three options;

To pay a sum to purchase the vehicle. This is known as a ‘balloon payment’ which is a large final payment
Return the vehicle
End the contract and take out a new personal contract plan agreement for a new car

How personal contract purchase works

As with all finance agreements, you will need to pass a credit check in order to get the finance agreement in place. This relies upon you having a good credit score and a good credit history.

A PCP contract typically lasts three to five years. As part of the contract, you agree a mileage limit for the term, then pay a deposit upfront, which is typically about 10% of the purchase price to secure the vehicle.

You won’t own the vehicle at the end of the agreement but you can choose to buy it by paying a final payment also known as a ‘balloon payment’. You will know what the balloon payment is going to be upfront as it’s agreed at the beginning of the contract.

You can also choose to end the deal without buying the car outright.

Why choose a personal contract plan?

A PCP agreement may let you drive a more expensive car than you might not otherwise be able to afford but with monthly payments to suit your budget
The monthly payments will be lower than you would have to meet with hire purchase or a personal loan, as you are only be covering the cost of the vehicle’s estimated depreciation – not its full value
If you want to change your car every few years, then a PCP deal can be good way to finance this
The up-front costs are normally quite low; the initial payment is normally around 10% of the vehicle’s value
The first year’s road tax is included
You don’t need to worry about the future trade-in or resale value of the car, as the lender guarantees your car will be worth a minimum sum at the end of the deal.
It’s flexible. You have several options at the end of it – you can even buy the car if you like. The final purchase price will be agreed at the start of the agreement.

Further considerations

You’ll often need to stay with the same dealer to be able to use any remaining equity in your car as a deposit for a new car through PCP
You won’t own the car during the contract period and will only own it at the end of the contract if you pay the ‘balloon payment’
You will have to make a decision at the end of the contract as to whether you wish to sell the vehicle, keep it or return it
If you damage the vehicle, you may incur a charge (any damage not covered in the fair wear and tear guide)
If you exceed the agreed mileage you will incur an extra charge. Additional mileage costs are typically 10p for every mile over the agreed limit, but this will be confirmed in your agreement
If the predicted minimum future value is set very close to the actual value of the car you will have little equity to roll onto another deal. If there isn’t any, you will have to get another deposit together for a new car
To end the deal early or cancel it, you must have paid at least half the value of the vehicle. If you haven’t, you’ll need to pay the difference before you can get out of the contract. The car will need to be in good condition too, or you might be charged for repair costs

Hire Purchase (HP)

A hire purchase (HP) plan is a very popular and flexible way for people to acquire the vehicle they want immediately and to take ownership of it once the value has been fully repaid. Hire purchase is similar to a bank loan that is secured against the value of the car, as once the monthly repayments have been completed you will own the vehicle.

How hire purchase works

You will pay a deposit to secure the vehicle – typically 10% of the vehicle’s price – and then your repayments will be calculated based on this figure, the remaining value of the vehicle and the length of the repayment term.

Once all the repayments have been completed, you will become the legal owner of the vehicle.

Why choose hire purchase?

There’s no contractual mileage restrictions or charges for damage
There’s no large upfront investment, the deposit is usually around 10% of the vehicle’s price and the cost is spread over a period of time and paid by fixed monthly instalments that will not increase – even if bank interest rates rise
You can save money by paying off your unpaid instalments early
You own the vehicle once your final instalment has been paid

Further considerations

The loan is secured against the vehicle. The vehicle can be repossessed if payments are not kept up
If you miss payments, this can negatively affect your credit rating
Maintaining a good credit score is crucial for future financial opportunities, such as applying for car finance and personal loans.
The finance company are the legal owners of the vehicle until the agreement is paid in full
Repayments will include interest charges, and the car will overall cost more than a cash purchase
The rate of interest will reflect the level of risk to the lender. Previous poor credit will represent higher risk and a higher rate will be charged

Lease Purchase (LP)

A lease purchase can be the ideal option for people who would like to own a vehicle but who can’t afford a large capital outlay upfront to do so.

Unlike a PCP agreement, a lease purchase agreement does not include maintenance. The monthly cost that you pay is the difference between the retail value and the depreciation of the vehicle plus interest.

This type of finance arrangement is therefore ideal for vehicles that hold their value.

How lease purchase works

As part of your contract, you pay monthly instalments which cover the difference between the value of the car at the start and the end of the contract.

When the lease purchase ends, you have two options:

Make the balloon payment and take ownership of the vehicle
Part exchange the vehicle

With part exchange, you make the balloon payment then lease a newer car.

Why choose lease purchase?

It allows you to have access to a vehicle with only a low initial payment
You’ll have lower monthly payments than if you opted to purchase via a hire purchase agreement
You can choose to settle your agreement early by paying off any outstanding payments
You will own the vehicle at the end of the contract once the balloon payment has been paid
Monthly payments are not subject to VAT

Further considerations

The balloon payment must be paid for at the end of the contract before you can take ownership
Sometimes it’s possible that the balloon payment will be higher than the residual value of the vehicle
You will have a mileage limit as part of your contract. If you go over the agreed mileage limit you will have to pay a fee at an agreed cost per mile. This is on average about 10p per mile, but will be confirmed prior to you taking out the contract
You can’t add maintenance or any other value-added services to your contract

Managing Your Car Finance Repayments

Once you’ve got a car finance agreement, it’s essential to manage your repayments responsibly. This includes making regular payments, keeping track of your credit score, and avoiding missed payments.

You should also review your finance agreement regularly to ensure you’re on track to meet your repayments.

Choosing the Right Car Finance Option

Choosing the right car finance option depends on your individual circumstances and needs. Some might even consider taking a personal loan (classed as an unsecured loan) to buy a car outright, although this tends to result in higher monthly payments.

Consider your credit rating, financial commitments, and ability to make monthly payments. You should also research and compare different finance options to find the best deal for you.

It’s essential to read the terms and conditions of any finance agreement carefully before signing.

Next steps

AMT Auto can arrange your car finance in-house to make sure that buying a car with us is as straight-forward as possible. If you’re looking to finance your next car purchase, then let us know and one of our team can take you through the different finance options available to you.