This is the most straightforward option and simply means paying a deposit and then financing the balance, typically over two, three or four years. Hire Purchase is a popular option as you have fixed costs over a fixed period of time. The deposit can be in the form of cash, or equity in a part exchanged vehicle or a combination of the two. The agreement can be settled at any time, simply by paying the outstanding balance less any interest rebate.
This is a purchase agreement governed by vehicle mileage. A predicted minimum value of the vehicle is offset until the end of the agreement (a Guaranteed Miniumum Future Value/GMFV). This future value is set by the finance company and allows you to know the least a car will be worth at a point in the future. This GMFV allows a balloon payment to be included in the contract so that you will never be in negative equity when the end of the contract arrives. This allows an affordable, low-risk funding package with a great deal of flexibility.
Like Hire Purchase, the agreement can be settled at any time by paying the outstanding balance (less any interest rebate) and the GMFV. However it is more common to take one of the following three options at the end of the agreement:
Part exchange for another car – if the trade-in value is greater than the GMFV then this equity can be used as a deposit for another car or received as cash back. Alternatively you can sell the vehicle privately and keep any profit over and above the GMFV.
Pay the GMFV – and keep the vehicle. You can even refinance the GMFV to avoid having to find a large cash amount.
Return the vehicle and walk away – if you believe it is worth less than the GMFV you can give it back and the finance company absorbs any loss.