Automotive finance – purchase plans
A purchase (or ownership) plan is a credit or loan product that allows the customer to take title (ownership) to the vehicle. The key purchase plan products are summarised below:
- Hire Purchase and Conditional Sale agreements - the purchaser borrows the required amount from a finance company and agrees to make regular payments over a set term. The lender retains legal ownership of the vehicle until the full amount is repaid (‘secured’). The borrower hires the vehicle from the lender until the loan and all charges are repaid (along with an ‘option to purchase fee’ if using hire purchase).
Personal Contract Purchase (PCP) – a form of Hire Purchase (or Conditional Sale) where some of the capital cost of the vehicle is deferred to the end of the agreement in the form of a large, final balloon payment. At the end of the agreement the customer has the option to:
- pay the balloon payment and keep the vehicle;
- hand back the vehicle without incurring further costs; or
- trade in the vehicle for a replacement.
- Lease Purchase - is a similar product to Hire Purchase or Conditional Sale, except that payments are structured like a lease agreement - where the customer makes a number of payments in advance rather than a deposit.
- Personal Loans – loans provided to consumers that are typically offered by banks, building societies and lenders directly. The borrower makes regular monthly payments and once the loan is repaid has no further obligations to the lender. The customer owns the vehicle (which means they have legal title) as soon as they buy it, and the lender has no rights over it (‘unsecured’).
Automotive finance – lease plans
Lease plans enable customers to hire or use vehicles without giving the opportunity to take ownership. The key leasing products are summarised below:
Contract Hire (operating lease) and Personal Contract Hire (PCH) – funds the use of a vehicle for a set period of time, instead of the overall ownership (or cost of ownership) of the vehicle. Since there is no intention for the customer (lessee) to own the vehicle, this removes the risk of depreciation costs. At the end of the agreement the customer hands back the vehicle to the leasing company (lessor).
Finance Lease – funds the use of a vehicle for business customers. Agreements can be structured to include a balloon payment at the end of the agreement to enable lower monthly payments over the term. The customer is usually responsible for selling the vehicle as an agent of the finance provider or leasing company at the end of the agreement.
More detail on both purchase and lease plan products are provided in the modules that follow, including other less commonly used motor finance products. Alternatively click on the links below to view: