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Car buyers confused by finance jargon

Emma Lunn
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Emma Lunn

One in five (18.8 per cent) motorists don’t know their PCP from their HP.

Drivers buying a new set of wheels on finance receive £1,000 more in dealer discounts than cash buyers, according to car buying platform What Car?

The What Car? Target Price report found the average discount on a new vehicle bought on finance at the beginning of May this year was £3,670. However, dealers were only willing to discount models by £2,595 when buying with cash – giving finance buyers a £1,075 windfall.

What Car?’s mystery shoppers also found people buying on finance also receive an average of £1,619 in deposit contributions from dealers, with some luxury models discounted by more than £17,000.

But even though 70 per cent of all private new car sales involve a finance deal, nearly a fifth of motorists don’t understand the differences between the types of finance on offer.

Personal Contract Purchase vs Hire Purchase

What Car? warned that car buyers risk unexpected fees and charges as a result of not knowing the difference between Personal Contract Purchase (PCP) and Hire Purchase (HP).

With PCP you’ll pay a deposit, followed by monthly payments for the remainder of the contract. You’ll then pay a “balloon payment” to take ownership of the car at the end of the lease. Alternatively you can part-exchange the car for a new model or simply hand it back to the leasing company

PCPs typically feature lower monthly instalments in favour of a larger final payment, with the expectation of using the car’s future resale value to cover the cost. However, buyers using this method are subject to mileage restrictions, with fees incurred for exceeding the agreed terms.

HP allows you to buy a new vehicle in instalments. Monthly payments are typically more expensive than other finance options. However, once you’ve completed the payment schedule and paid a final “option to purchase” fee, the vehicle is yours.

Dealer deposit contributions

What Car? found finance terms are further incentivised through dealer deposit contributions – payments made by dealers towards the deposit on the vehicle – with the average contribution standing at £1,619. Some premium models, including the BMW 760Li xDrive were offered with more than £17,000 towards the deposit.

Steve Huntingford, editor of What Car?, said: “Finance plays a huge role in the modern car buying decision – the latest figures show seven in 10 private new car purchases are made on finance. We are also seeing a larger number of dealers offering zero per cent finance terms. With an average deposit contribution of £1,619, this means it’s often cheaper for new car buyers to purchase their next vehicle with zero per cent finance than outright with cash.”