The various sorts of finance bring their own advantages and pitfalls. So here we explain exactly what the acronyms HP, PCH, PCP and FGV mean and tell you the pros and cons for each...
Hire Purchase (HP) or conditional sale
The conditional sale is common at franchised dealers. You pay an initial deposit, then the balance plus interest is divided into fixed instalments over a fixed period. The vehicle is sold to you provided all the payments are made, the car is comprehensively insured, and the car is maintained in good condition.
You only own the car when the last payment is made.
With Hire Purchase the terms are similar, but you hire the car with a final 'option to purchase' fee payable at the end of the contract.
Cash windfall? Pay off the debt! If you're able to pay off any credit outstanding with a lump sum, it is worth doing. You may have to pay a settlement or termination fee, depending on how much you still owe, the interest rate and how long the credit or loan agreement still has to run.
Personal Contract Hire (PCH)
If you are interested in a nearly-new car, you may consider Personal Contract Hire (PCH), also called Personal Leasing.
This is a long-term rental where maintenance is covered, but ownership of the car never passes to the instalment payer. This may be suitable if you are self-employed - ask your accountant for advice.
Insuring the car
You are still liable for the loan if a car is written-off, so don't insure it third-party only.
Fully comprehensive cover only pays out on the basis of market value at the time of an accident or theft - less than the price on which the credit agreement was based.
Gap Insurance covers the 'gap' between the market value payout and the original price, or finance settlement figure.
Gap insurance is usually purchased by a single payment at the time of signing the agreement.
Personal Contract Purchase (PCP)
Normally arranged through the dealer for new or nearly new cars, you pay a deposit and agree a figure of what the car will be worth at the end of a period — usually three years. This is called the figure guaranteed value (FGV)
Subtract the FGV and the deposit amount from the car's price, and add interest. That's what you pay in monthly instalments, which usually work out lower than other finance schemes.
After the designated period, you either pay off the FGV to own the car, or give it back to them.
The disadvantages are that the FGV could be quite a high amount (especially if the dealer has been over-optimistic about the resale value of the car), you could end up with neither car nor money, you would have to maintain the car to the manufacturer's standard, and your mileage may be restricted.
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