In this day and age, you can pretty much buy any new car on finance. And whilst you have lots of options to choose from, having a range of choices can make it hard to know which arrangement suits you best.
So we thought we’d break it down for you. Here are your options, their pros, cons and everything you know…
Personal Contract Purchase (PCP)
PCP lets you park a new car on your drive in exchange for an initial deposit and then a series of monthly payments. Once this agreement ends, you won’t own the car and will then hand it back to the dealer provided it’s in good condition.
If you decide you want to keep the car, you can buy it outright in return for a final payment – sometimes known as a ‘balloon’ payment. This payment can be financed separately if you can’t pay it off in one go.
This price – and the pay monthly cost – will depend on the size of the deposit, the cost of the car, the interest rate and how much the dealer expects to sell the car on for when your agreement ends. This amount is often referred to as the Guaranteed Minimum Future Value (GMFV).
A PCP contract will typically lay out the condition the dealer expects the car to be in once returned and the number of miles you’re allowed to cover. Return the car with scrapes and bumps that go beyond usual wear and tear, or with too many miles on the clock and you could face a fine at the end of your contract. Make sure you read the terms of your contract thoroughly.
- The deposit amount can be flexible
- You don’t have to keep the car at the end of your contract
- You can pay out of your agreement if you want
- You can select the length of your agreement i.e. 12 – 48 months
- You should expect to pay a penalty fee if the car has signs of wear and tear
- If you go over on the agreed mileage, you will have to pay a charge
Leasing/Personal Contract Hire (PCH)
Ever hired a car on holiday? PCH is pretty similar, except you can keep hold of a new car for a number of years as opposed to a couple of weeks – it’s basically a long-term rental.
In the contract with your lease provider, the mileage allowance and monthly payment costs will be covered. Similar to a deposit, you’ll have to pay an initial rental. However this is usually less flexible than a PCP or HP agreement and is usually calculated in line with three, six or nine monthly payments.
At the end of your finance term, you won’t own the car and will not be given the opportunity to buy it outright.
- No depreciation risk
- Fixed cost motoring
- Additional costs for maintenance
- Large deposit
- Car must be returned at the end of the agreement
- Possible penalties for wear and tear
- Mileage limited
Hire Purchase (HP)
This approach is similar to taking out a mortgage on your home. You pay the initial deposit, and a finance company then loans you the final amount for your new car. Again, you will then pay this back monthly across an agreed period of time.
Both the deposit and monthly instalment costs will depend on the cars value, the contract length and the interest rate. Unlike PCP, you won’t have to decide whether to take the final payment option as you will have covered the cost of the car and therefore own it outright by the end of your contract.
Therefore, HP doesn’t include T&Cs for damages or mileage.
- No mileage limit
- No fines for wear and tear
- You can choose the length of the contract
- Can be more than a regular bank loan
- HP can be more expensive monthly than PCP for short-term agreements
- You will not own the car until the end of the contract
If you’re looking for the cheapest method of buying a car, you should consider purchasing in full or part cash. This is the only option that saves you paying interest.
If you’re paying with cash just make sure you have savings left over for any unforeseeable costs after the car has been bought. If you haven’t got enough cash to pay in full, you can supply the largest deposit possible.
Whether or not you have savings to purchase the car, you may want to consider using a credit card – as this will mean you benefit from credit card purchase protection. Just be sure to pay off the bill in full the following month!
This kind of loan could help you get your new car without the same terms and limits as PCP or leasing. As long as you’re happy to arrange finance yourself, traditional loans could remove the hassle of returning the car or monitoring your mileage.
The obvious consideration for this kind of financing would be ensuring you can afford the agreed monthly repayments. Failing this, your car could very well be repossessed.
- You own the car outright from the start
- You can arrange the loan over the phone
- Competitive, fixed interest rates
- Your existing credit rating must be good
- You have to pay off interest prior to starting your car repayments
- Could affect your ability to borrow more
- Each bank has different loan rates, so you may need to shop around
Author: Joseph Lazare