Caravan finance explained

In addition to the types of finance on offer, there is often a lot of financial jargon used, which can add to the confusion. In this article, we outline a couple of the most popular options and give you a breakdown of the main terms that you might come across.

What is caravan finance?

Caravan finance is a term that covers the different options available to potential buyers who want to purchase a caravan but can’t or don’t want to pay the full cost upfront on the day of purchase. There are many different types of loan, otherwise known as caravan finance options, available - each with their own unique features, benefits and drawbacks. The main types that you are likely to encounter are Hire Purchase or HP, Personal Contract Purchase or PCP, and Personal Contract Hire or PCH. Below we outline what these are.

Hire Purchase or HP

This option allows you to buy a caravan, by paying a deposit upfront and then paying off the rest of the debt over a set amount of time, usually in monthly instalments with added interest on top. HP monthly repayments are usually high, but they can be reduced by maximising the amount you pay in the initial deposit.

Personal Contract Purchase or PCP

Similar to HP, with PCP you also pay an initial deposit and then pay back a set amount each month with added interest. The main difference between these two types of loan is that with PCP, the monthly instalments are usually for a lower amount and there is the added option of paying a large sum at the end of the term to complete the purchase, or return the caravan if it has not been subjected to any damage and is still within the agreed mileage limit.
You could also have the option to exchange the caravan for another caravan from the dealer who agreed the finance deal in the first place, this way you can use any equity you’ve built up in your current caravan towards your down-payment.

Personal Contract Hire or PCH

If you opt for PCH, you are actually hiring a caravan as opposed to borrowing money to purchase it - you will never own the caravan. Again, a deposit and monthly instalments are required. This finance option offers the lowest monthly instalments of all and at the end of the contract, as long as it is in good condition, you simply return the caravan.

Terms that you need to know

Below you will find a quick jargon-buster to help make understanding those complicated descriptions and terms and conditions less of a headache.

APR or Annual Percentage Rate

This is the total interest you pay each year on the amount that you borrowed. It also includes any fees that you may be subjected to if you fail to meet your responsibilities or for other reasons as per your loan's terms and conditions. It will help you when comparing different finance options.

Balloon payment

If you choose a Personal Contract Purchase or PCP agreement, the balloon payment is the large payment at the end of the term that secures your ownership of the caravan.

Credit agreement

This is the official name given to the document you will receive and will contain all the important details of your loan agreement between yourself and the lender.

Credit history or credit rating

This is a value which is used by lenders to ascertain whether you are eligible to receive a type of loan or not. It is an overall score or rating based on your current financial situation and past borrowing. It will take into account a number of factors such as past or current debts and loans or credit cards that are still outstanding or have been paid back.

Depreciation

This refers to the amount of monetary value your caravan will or could lose in the future due to damage and mileage.

Fixed rate

This means that the amount you need to pay each month will stay the same regardless of the Bank of England Base Rate.

Flat rate

This is the amount of added interest you will pay on top of your monthly repayments each month. Unlike APR, it refers to interest alone and does not include any other charges that may occur.

Mileage allowance

Before you enter into a loan or other type of caravan finance, you will usually be asked to anticipate how many miles you will drive in the caravan over the set term. This will influence the loan agreement that you receive and variables such as interest rate.

Excess mileage

If you go over your mileage allowance during your term, at the end of the agreement you may be subjected to a pence-per-mile charge.

Minimum Guaranteed Future Value or MGFV

This is the minimum value that your caravan will be worth at the end of the loan agreement. It also affects the variables in your individual agreement, such as interest rate, monthly payment amount and if opting for a PCP agreement, the figure for the balloon amount.

Total amount payable

The total amount of money you’ll have paid by the end of your finance agreement.

Term

The agreed payment period or timeframe by which you ended to have paid back the loan e.g. 3 years.

What next?

We hope this guide has helped, take a look at some of our great caravan finance options, available here through AutoTrader.