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How exactly does car finance work?

So, you have your eye on a car. You have researched it, spoken to those in the know (like your friendly Hippo Account Manager) and picked out the vehicle that’s right for you. Now for the not so interesting part… the finance.

In this article, we aim to strip away the cloud that often surrounds car finance, so you can see how it works in practice.

What Finance Options Are Available To You?

At Hippo, the main types of car funding we offer are PCP (Personal Contract Plan), PCH (Personal Contract Hire and HP (Hire Purchase). We have a separate article you can look at here with all the details of how they work and the advantages and disadvantages of each but the easiest way of looking at each is:

PCP

PCP deals are the most popular and flexible form of finance. You can choose if you want to pay off the vehicle at the end by paying an agreed “balloon payment” or you can choose to hand the car back.

PCH

PCH is the purest form of leasing. You will never own the car. Think of it like a subscription service – you get to use the vehicle but never need to worry about depreciation and if you take out a maintenance contract you pretty much don’t have to think of anything apart from putting fuel in the car!

HP

HP is the most traditional form of finance. Agree a set amount of interest to pay over a set period (normally 2 to 5 years), pay the regular monthly payment and at the end…the car is yours!

The trick come is recognising what is the best form of finance for you…and you only!

Which Car Finance Is For Me?

So, if you are not sure if you will want to keep the car at the end of the finance period and expect to do a regular number of miles per annum, the flexibility of PCP could well be right for you. With PCP, you are effectively paying the difference between the cost price of the vehicle and what the finance company thinks it will be worth at the end of the agreed period. It has the added advantage of you not needing to take a risk on the value of the car at the end of this period – if the value has dropped unexpectedly – it’s not your ‘problem’ as you have a guaranteed minimum value. If, on the other hand, the model that you chose is in demand and values have held well then you might actually have some decent value in the car and you can choose to pay the balloon payment or use this additional equity (value you have in the car) towards a deposit on another, new deal!

PCH is fantastic for those who don’t care about ever owning the vehicle – use it, pay for the use, hand it back and get a new one. Very popular with those under 30 who often prefer to renting versus buying, it’s also getting more popular with small businesses and those who used to automatically go for PCP or HP.

HP is often the best for those who like to have something to show for their payments at the end of the agreement period as you will own the vehicle outright once you have made all of your payments. The monthly payment will likely be more than for PCP or PCH when you compare the same vehicle but if you expect to do a lot of mileage or want to own the vehicle at the end its likely to be the best choice for you. Another point to make is that some buyers prefer to buy a nearly new or used car and finance it through the traditional route of HP. This can be a smart option as you still get a good, solid car (providing you get it from the likes of Hippo) but the monthly payment will be reduced to reflect the drop in cost you get from buying a nearly new or used car. There is no charge for exceeding your mileage estimation with HP as you don’t need to estimate it in the first place unlike PCP or PCH.

How Is Each Finance Option Different?

The technical elements around each type of finance vary in that with PCP, the Finance Company is looking to ensure it does not lose money and you are paying for the anticipated drop in value from when you get it till when you hand it back. With PCP, should you choose to pay the balloon payment, the finance company knows its covered but if you hand it back it needs to rely on its original estimation of the cars value, sometimes called its residual value which is why they ask you to estimate your mileage up front and you will need to pay excess mileage charges if you go over so be sure to check how much the excess mileage charge is.

With PCH you are effectively hiring the vehicle so the finance company needs to make sure its value when you hand it back is the same or higher than it thought it would be, so providing you are at or under your mileage estimation and the car has been well maintained, it’s their problem and you can swop out your car for a lovely new one!

With traditional HP finance, it’s all about the APR (Annual Percentage Rate) which are all the costs involved in purchasing the vehicle expressed at an annual rate. Think of it as a measure of the cost of funds you are borrowing. It’s a handy way of comparing one finance provider against another but you should also look at the monthly repayment amount and check it’s affordable for you.

So there you have it! Hippo offer all of these finance types and we have dedicated and helpful account managers to help you with both the vehicle and the finance and with our huge selection of both cars and finance providers we are genuinely in a position to provide what is best for you, whatever you choose.

To get behind the wheel of a car soon, all you need to do is browse our cars available for finance and apply through Hippo Motor Finance online. Alternatively use our instant finance application tool to check your eligibility for car finance in seconds.

Representative Example of Credit

We expect more than 51% of our customers to achieve this rate.

Loan AmountTotal Cost of CreditRepresentative APR48 Monthly PaymentsDeposit AmountLoan TermTotal Amount Payable
£7,500£3019.1619.1% APR£219.77£048 Months£10,519.16

We are a broker not a lender and our registered office is Trident Park, Trident Way, Blackburn BB1 3NU. Our contact number is 01254 919000

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