Buying a car in the New Year and looking for finance?

We ask what finance type is most suitable for you.

When buying a car and it comes to choosing between a Personal Loan, HP or PCP to finance the purchase the old phrase “Horses for courses” really does apply.  It is essential that each individual familiarise themselves with how each of these types of finance works before entering a contract, so they can decide on which is most suitable for their particular circumstances and pick the right type of car finance.

There is no overall “better” or “worse” type of finance, it really comes down to the suitability of each product for the individual.

Typically your Bank or Credit Union Loan is unsecured against the vehicle so whilst it has a higher interest rate you have more flexibility when it comes to deciding what you do with the asset, as that will belong to you from day one. You will have an obligation to pay back the bank no matter what happens to the car in future, but you can also decide to dispose of the vehicle without worrying about the finance, or clear the finance early if the opportunity arises and not be liable for the interest on the outstanding payments.

HP and PCP

With HP and PCP you will typically have a lower interest rate applied and hence lower monthly repayments. However, the finance is linked to the asset so you will not own the vehicle until the final repayment is made (in the case of HP) or until the Guaranteed Future Value is paid down by you (in the case of PCP). You will typically also need to pay interest on the outstanding repayments if you want to clear your finance ahead of schedule.

PCP offers a much lower monthly repayment due to the Guaranteed Future Value of the vehicle being underwritten by the Bank or the Motor Dealer, and this value is subtracted from the capital cost of the vehicle at the beginning so you are financing a much smaller amount.  At the end you have the option to purchase the vehicle for the Guaranteed Future Value amount, or hand the car back, or if the car is in positive equity trade it in against a new deal. Typically with PCP you are also asked to pay a deposit upfront which also reduces the amount to be financed. But if you hand the car back this should be counted as part of your monthly outgoings since you will need to save for your next deposit at the same time.

Decide what suits your circumstances

Whatever the finance type, the most important thing to remember when picking a car finance type is to choose the one that suits your current circumstances and likely future circumstances.  For example if you know that you have a fixed monthly budget and that is likely not going to change over the course of 3 years, and you have the ability to save a little each month for the deposit on another PCP, then there is little doubt that PCP would be very favourable. If you have a similar predictable budget but don’t want to bother with deposits and guaranteed buybacks then HP may look attractive.  Whereas if flexibility is your main concern and you don’t mind paying a higher monthly repayment then the traditional bank or credit union loan would probably be most suitable.