Monthly payments

Definition

In a Car Finance Agreement, you spread the cost of your loan across affordable monthly payments over an agreed period.

Your monthly payments are calculated by the lender based on the amount borrowed, plus the interest over the length of your agreement.

Additional factors used to calculate the cost of your monthly payments will vary depending on the type of agreement, so it’s important to assess your options carefully to get the best deal.

If you know your monthly budget, why not find out how much you could borrow with our quick and easy Car Finance Calculator?

PCP vs HP monthly payments

Hire Purchase (HP) and Personal Contract Purchase (PCP) are both popular finance options however, with HP your monthly payments are usually higher.

This is because HP factors in the entire cost of the vehicle, meaning at the end of the agreement you own the car.

With PCP, your monthly payments do not cover the cost of the vehicle.

Instead they are calculated based on the anticipated Depreciation (how much value the vehicle loses), and interest over the length of your contract.

Because you’re not paying to own the vehicle, PCP monthly payments are often lower than a HP agreement.

If you decide you want to keep the vehicle at the end of your PCP agreement, you’ll need to pay the optional final payment (or Balloon Payment).

Car leasing monthly rentals

With Car Leasing, your monthly payments are often referred to as monthly rentals, as you’re effectively renting the vehicle from the leasing company.

Typically, car leasing offers lower monthly payments than PCP and HP, but there is no option to purchase the vehicle at the end of the agreement.

Additional factors to consider

APR

Your APR determines the cost of interest over the length of your agreement. The higher the APR, the more interest you pay.

Lenders will usually offer their lowest APR to individuals with a strong Credit Rating. If you have a poor credit score, you’re APR is likely to be significantly higher.

Deposit

A Deposit isn’t always required in a car finance agreement but is often an effective way to lower your monthly repayments. Because by making an upfront payment, you’re borrowing a smaller amount and paying less interest.

Term length

Your Term Length is another important factor to consider. With a Short Term Loan your monthly payments will be higher, but the interest owed will be less.

Whereas spreading your repayments over a longer period will lower your monthly cost, but the interest paid will be greater.

Depreciation

If you opt for a car leasing or PCP agreement, the expected depreciation of your vehicle is a significant factor in determining the cost of your monthly payments.

For example, a brand-new car loses around 60% of its value in the first 3 years, whereas a second-hand car will have a slower depreciate rate.