Buying a car on finance is a popular option, as many people don’t have the cash to buy a car outright in full. It enables drivers to start using a car immediately, instead of relying on other methods of transport while they save up.
In 2020, around 90% of new cars sold at dealerships were bought on finance. Around 2 million cars were bought on finance in the UK that year. With this option becoming more and more popular, it’s important to realistically consider the options.
What types of finance can be used to buy a car?
The most common ways to buy a car on finance are personal or bank loans, hire purchase (HP) and personal contract plan (PCP). These motor arrangements require you to put down an initial deposit and you have to pay interest for both. They can be more accessible to people who can’t buy a car with cash and are struggling to secure a bank loan.
What is HP?
HP is a method of buying a car on finance, making monthly payments.The goal of HP is to be able to purchase your car at the end of the contract. Until then, you can still use your car, but it’s technically owned by your HP provider.
It’s worth noting that if you miss one of these monthly payments, your car can be repossessed. This option is more expensive than some bank loans, but cheaper than PCP (if the goal is to buy the car outright at the end). HP also tends to be easier to obtain than bank loans.
What is PCP?
PCP is a method of leasing a car with the option to purchase it at the end of your contract. This method allows you to pay for your car in low monthly payments. It’s the most common way to buy a car on finance and is deemed a secured loan.
You make three payments:
- Initial deposit
- Set monthly payments
- Optional balloon payment
The optional balloon payment at the end of a PCP contract is a lump sum which means you have purchased the car outright. Before this, the car is under the name of the PCP provider.
You can also decide to return the car, giving you more flexibility than other financing options.
PCP agreements usually have agreed mileage limits. You are expected to take good care of the car, so if you end up returning it, it’s in good condition. It is always important to check the terms of your PCP arrangement, with some dealers adding lots of add-ons and packages that motorists do not need. As a result, more than 500,000 UK motorists have been eligible for PCP finance claims, due to the mis-selling of products.
Do you want to change your car often?
If you value flexibility, you might prefer PCP. At the end of your contract with PCP, you can decide to return your car or to swap it for another one. In fact, some companies offer early upgrades.
This flexibility doesn’t exist with HP, as you’re tied to the car you picked at the start of the contract.
Do you want a higher or lower monthly fee?
The option with the lowest monthly fee is PCP. This is because they expect you to pay a balloon payment at the end of your contract if you want to keep the car.
Do you want to own the car outright or hand it back after 3 years?
If you’re sure you want to own the car at the end of the contract, HP can be more cost effective. The higher monthly fee you’re paying goes to cover the cost of purchasing the car outright.