Choosing the Right Type of Car Finance

Choosing the Right Type of Car Finance

by David Redmond on 18 Jul, 2011

A new or used car might be one of the most expensive purchases you ever make, but there is a wide choice of finance options available to you offering a variety of flexible deposits, interest rates and payments.

Ford direct offer car finance specifically designed for motor vehicle purchase, which can be tailored to the length of time you intend to keep the car and the amount of money you wish to borrow.

Most motor finance will have a fixed rate of interest, but with some products you can set the amount of deposit or final payment contributed, helping to keep monthly payments at an affordable level.

Whichever type of car finance you choose, it’s important to take into account the following:

  • The overall interest rate – use the APR for a true comparison
  • The length of the finance contract period
  • The amount and affordability of monthly payments
  • Any additional payments due at the start or end of the finance period
  • Any early repayment penalties

The most common types of car finance are:

Hire-Purchase or Conditional Sale:

You and your car dealer agree the amount you need to borrow (less deposit and /or part exchange) and your dealer contacts a motor finance company on your behalf. Subject to credit checks, the motor finance company pays the dealer for your car. You repay the finance company as per the credit agreement. You do not own the car until you make the final payment. In some hire purchase agreements (called Lease Purchase) this final payment can be higher in order to keep your monthly payments lower.

Personal Contract Purchase (PCP)

Again you and your dealer agree the amount to borrow, but you defer part of the cost until the end of the agreement, making your monthly payments to the finance company more affordable. During the financed period you pay only for the difference between the full loan and the deferred amount, plus an interest charge. At the end of the agreement you have the option to:

  • Pay the minimum guaranteed future value (MGFV), also known as a final or balloon payment and keep the car.
  • Hand the car back
  • Trade the car in for another one by swapping to another PCP scheme


Personal Leasing (Personal Contract Hire)

You and the car dealer agree a fixed monthly rental payment over an agreed period, which will usually include service and maintenance. The finance company purchases the car, and you pay them the fixed monthly rental. At the end of the rental agreement you hand the car back to the dealer or finance company. There is no option to purchase the car.

About the Author

David Redmond

David Redmond is a Partner of Don Gilliard Finance Group. He is a fee-only, independent financial advisor and financial planner. For over 15 years, he has been helping individual investors and their families realize their investment goals.