Financing your Vehicle
There are so many ways to buy a new or second-hand car; gone are the days when cash and HP were the only methods. Manufacturers can now provide plenty of choice for consumers. For most people a car is the second most expensive asset (after your home) that you will probably ever have to finance, at AV Leasing we try to keep the choices a lot less confusing than the range of mortgage options through which home-buyers have to navigate.
We try to keep our customers spoilt for choice this simple guide will help any car buyer pick their way through the schemes on offer to make sure they select the right one for them.
Hire Purchase (HP)
This is a well known established method of funding a purchase. Under an HP agreement a customer will pay an initial deposit and then the remainder of the balance and interested are paid over a period of time, usually in monthly affordable installments.
Leasing
Leasing is a contract between a leasing company like us here at AV Leasing and the "Lessee" is the term used for the customer. The leasing company buys and owns the asset and the lessee is renting that asset for a set period of time on a set fee.
The leasing company can claim back allowances on the assets and these benefits are passed onto the lessee in the form of reduced repayments.
There are two types of leases: Finance Leases and Operating Leases
Under a finance lease the rental covers virtually all the costs of the asset, so the value of the rental is equal to or greater than 9% of the cost of the asset.
The most common form of operating lease is contract hire. This is essentially gains the customer the use of the asset together with added services. One such example of such would be a fleet of vehicles
An operating lease will not run the full life of the asset and the lessee will not be liable for its full value. The lessor or the original manufacturer will assume the residual risk. This type of lease will normally only be used when the asset has a probable resale value.
Balloon Rentals
A balloon rental payment is made over the period of the lease. Often a larger payment or lump sum called a balloon payment is made at the beginning or end of the lease. Usually the customer would pay this on the last day of their lease.
Lease Purchase
A lease purchase is basically the same as HP the main difference is in the terms and structure of repayments. Some finance companies differentiate Lease Purchase and Hire Purchase by using it where the customer wishes to defer payment of a substantial part of the asset cost until the end of the agreement
Personal Contract Purchase (PCP)
PCP’s usually operate for two years, at the start of the period the customer will pay a deposit and then have set monthly repayments. At the end of this contract the customer can make 3 choices:-
- They can start the process all over again with the dealer and trading in the car and paying off any Minimum Guaranteed Future Value (MGFV) to the finance company. Any surplus can then be put towards the deposit on a new car.
- You can return the vehicle and walk away. If market conditions have changed and the car is worth less than the MGFV the lender will absorb any loss. This is provided that the vehicle is in good condition for its age and does not exceed the agreed mileage.
- You can keep the car by paying off the MGFV. Even if the vehicle is worth more, the customer only has to find the agreed MGFV set at the outset of your finance plan.
Both new and used vehicles can be purchased on a PCP plan
Conditional Sale
Conditional sale is the most common form of car finance after PCPs and is what most customers describe as Hire Purchase. Conditional Sale means that the vehicle is sold to the customer subject to certain conditions such are:-
- All the payments are made on time
- The vehicle is fully comprehensively insured at all times
- The vehicle is kept in good condition
It starts with a customer paying a deposit this is followed by the balance plus interest being paid in fixed installments over the set contract period. Most contract periods are 36 months. If all the conditions are met full ownership passes to the customer when the final installment is paid. As the vehicle is not owned by the customer until all the conditions have been met. The lender still has the right to repossession should the customer default from under the terms of the agreement.
Hire Purchase
Traditional HP is very similar to Conditional Sale, except the customer hire the vehicle for a fixed period during which time they repay in installments. The total cost of the car plus interested. At the end of the contract period the customer can pay a nominal “option to purchase” fee to obtain ownership of the vehicle.
Personal Leasing
Value Added Tax changes in August 1995 now allowed the motor finance industry to develop Personal Leasing Plans (PLP). This is a new area for the car finance market and will probably take several years to take off properly.
