If you need a new car, but haven't got the cash to buy it outright, you'll need to finance the purchase. There are many different ways of doing this. For a lot of people, a personal loan is the obvious path, but there are but there are more flexible options for those who care to look. Traditional Hire Purchase (HP) deals remain popular but Personal Contract Purchase (PCP) and Personal Contract Hire deals can offer cost advantages. So what's the difference between them, and which is the best for you?
What is a personal loan?
Unsecured personal loans are still popular among car buyers, despite the fact that the days of 2% and 3% interest rates are long gone. Loans best suit people who prefer to own their car from the outset and want to keep it for longer than two or three years, but they can be a more expensive way to buy than using finance arranged through dealers.
When should I choose a personal loan?
- You don’t have a deposit to put down against a finance deal
- You want to own the car outright
- You plan on keeping the car long-term
- You don’t want to be limited by annual mileage restrictions
- You have a good credit rating
Personal loans - potential problems
- Advertised rates that never materialise: only people with good credit ratings will be offered the best APRs
- Missing loan repayments: unlike dealer finance, it’s not just your car at risk of repossession if you default; your home is at stake, too
- Missing out on added-value deals: some dealers will often wrap sweeteners such as ‘free servicing deals’ into their finance agreements
What is hire purchase (HP)?
Hire Purchase, also known as Conditional Sale is less risky than a personal loan because credit is secured against the car. Rates tend to be more competitive, too. HP is usually dealer arranged, so it can be a quick way to get credit. Agreements involve an upfront deposit – usually around 10% of the loan – followed by a series of fixed monthly payments. You are the registered keeper, but the finance company owns it until the final payment is made.
When should I choose hire purchase?
- You want to own and keep the car long-term
- Your budget suits fixed monthly payments
- You’re a low risk-seeker: credit is secured only against the car
- You want flexibility: loans can run from two to four years, and monthly repayments can be lowered with a bigger deposit
Hire purchase – potential problems
The ‘option to purchase’ Sign up to this to own the car at the end of the agreement. There is usually a nominal admin fee of around £100 attached, included in the APR.
Early settlement fees If you sell the vehicle before the finance is paid off, you’re still liable for the debt. Always tell the finance company first.
Personal contract purchase (PCP)
What is personal contract purchase (PCP)
PCP works in a similar way to HP, with a fixed interest rate and lending periods. Agreements involve a deposit, monthly repayments and a final ‘balloon’ payment. The size of the ‘balloon’, or what’s known as the guaranteed future value (GFV) of the car, is based on the length of the loan and anticipated mileage. At the end, you can return the car, keep it by paying the ‘balloon’, or trade it in, using any equity for a new deposit.
When should I choose personal contract purchase?
You want low monthly repayments. These cover depreciation and interest while the bigger and voluntary cost of ownership is deferred to the end of the agreement, payable in a lump sum, or balloon.
You want flexibility. Having plenty of options means you can adapt to any changes in your financial circumstances.
Personal contract purchase - potential problems
- Negative equity – a car’s end value isn’t always higher than its guaranteed future value, and can be lower. The bigger the balloon and longer the PCP, the bigger the risk.
- Miscalculating your mileage – go over the agreed figure, and you’ll face an excess fee. Underestimate and you’ll pay a bigger balloon than you need to.
Personal contract hire (personal lease)
What is personal contract hire
Personal leasing is effectively long-term car rental. You pay a deposit followed by fixed monthly repayments. Leasing can be cheap but there’s no option to buy; you simply hand back the car and walk away. Lease agreements involve a mileage limit – usually around 10,000 a year – and, although you don’t own the car, you are responsible for its upkeep and will have to pay for any damage beyond ‘fair wear and tear’. Some leases include servicing and maintenance, but they’re not always cost-effective.
When should I choose personal contract hire?
- You don’t want to own the car
- You want to change the car you drive frequently
- You want a fixed cost of motoring
- You want to drive a more expensive car than your budget allows
- You don’t want to be exposed to cost of the car’s depreciation
Personal contract hire - potential problems
- Cars with poor residuals – this will increase your monthly repayments
- Early termination penalties – read the small print before you sign
- Annual mileage limits – you’ll pay a penalty fee for excess miles.
- Penalties for damage – keep all service records; take photos of minor scuffs; get dents or scratches repaired; and have the car professionally cleaned before you hand it back.