HP stands for Hire Purchase. This is a popular option for people because you are able to spread out the cost of the vehicle over an agreed period of time. A deposit is paid then monthly instalments are made. Along with the cost of the car, you also pay interest if you choose HP Finance. Ownership of the car is retained once all payments are made and the HP agreement finishes. Until you make all payments, the car ultimately belongs to the finance company you are making payments to.
Leasing A Car
A car lease is effectively the same as renting a car. You only pay for what you use and you don’t pay for the total cost of the car. This means payments are made towards the car but those payments do not go towards ownership of the car. To put it simply, you never really own the car. Two main types of leasing deals are Personal Contract Hire (PCH) & Personal Contract Purchase (PCP). With PCH, at the end of your agreed lease term you give the car back. With PCP you have the option of buying the car at the end of the lease term. If this is an option you would consider, it’s important to research the differences between PCP and PCH as the monthly costs are dependent on certain factors.
If you want full ownership of the car straight away, buying a car outright may be the best option for you. To buy a car outright means to use your money to pay the full amount of the car in one go. Buying a car outright may work well for a young person getting their first car. If a young person is in education then monthly payments may be harder to manage. In the event that buying outright is the best option, remember to have emergency savings in case anything happens with the car.
Whatever you choose, it’s important to keep a few factors in mind:
Depreciation is the difference in price of a car over time (e.g. when you buy it vs. when you sell it). Whilst there are many factors that are part of car depreciation, running costs and the quality of the car are key factors. Typically after 3 years of owning the vehicle, it has been suggested by various sources that the value of the car goes down by 50%. It is worth checking which cars have the best holding value if the value of the car is an important factor to you.
Although you could look at interest rates, it’s in your best interest to look at the Annual Percentage Rate (APR). APR will give you a view of all costs. Compare rates and shop around to ensure you get the best deal.
It is important that you can afford to pay for the monthly payments each and every month of your contract. This requires you to think ahead in regards to your finances in the future. Think about your future career choices and investment choices and question whether or not monthly instalments will work best for you. Even if you can afford it, be certain that you will want it for the entire term agreed as there can be additional charges in the event of early termination of the contract.
This post has been written by me from my personal finance website, Refined Currency.