Are you a salaried person or a business owner who wants to spend their savings on buying a new vehicle? No matter who you are, you probably don’t want to buy a car by using your cash at bank. This is why in order to finance the car purchase many financial institutions in the UK provide car financing schemes to customers who are interested in buying cars.
These financing options and their covenants are quite different from each other. This is why it is imperative to know which type of financing option should you avail, so that you can make a prudent decision. Here we have addressed this issue and have pointed out which financing option is best for your vehicle.
Hire Purchase Agreement (HPA)
Hire purchase is a type of car financing option under which the customer has to pay some amount as a down payment, while the remaining amount is paid as instalments by the customer over a period of certain number of years. This type of financing option is suitable for those people who, at the end of their payment schedule, want to own their car. Most families and family men use this financing option when buying a car.
This car financing option is mostly used by businesses and corporations. This is because the car isn’t purchased by the company. Rather it is leased out to the company by the lender who will charge a fixed amount as a rental fee for using the vehicle. The company cannot list these vehicles under its asset column of balance sheet rather it is listed in the liability column. Also, after making all the payments the depreciated car is not transferred in company’s name, rather the company leases out new vehicle with improved performance for its business activities.
Just like a hire purchase agreement, chattel mortgage is also a type of car financing option where the ownership of the vehicle is transferred in the name of the customer however, the car acts as collateral for the mortgage. Under this option the customer can finance the total purchase price of the car. The finance cost or interest expense is also tax deductable. This financing option is similar to the home mortgage where a fixed payment has to be paid monthly till the principal and the interest has been paid off. However if the customer is unable to make mortgage payment then the lending institution will sell the vehicle at a fire-sales value (FSV) to cover its losses.
If you are someone like Harvey Spectre who enjoys driving expensive cars then financial lease is the financing option that you must avail. Under the financial lease the lender leases the vehicle to the customer (borrower) but little or no capital outflow occurs immediately. This car finance option is mostly used by business people as the payments of the lease are recorded in the earnings before taxation section (EBT in accounting terms) this means that the payments are tax deductable.