Every week we receive and approve dozens of loan applications, with buying a car being one of the top reasons why people want to borrow with us.
There are all kinds of reasons why you might be looking to upgrade your car. Whether you’re looking for something new and swanky, or something more green, it’s good to know your buying options and the different ways to pay or spread the cost.
Understanding Your Options
Personal Contract Payment (PCP)
PCP is one of the most popular options and the one you’re most likely to see offered by car dealers. These types of contracts can seem quite attractive. But, they can also be quite complex, so it’s essential to understand what you’re signing up for.
Just like with other types of finance, with a PCP, you’ll make a monthly payment. This repayment is based on an amount less than the value of the car, which keeps the payment itself quite low.
Because of this, PCP can often appear more attractive than other forms of finance. The downside is that you won’t own the car unless you decide to make an additional one-off payment (called a balloon payment) at the end of the contract.
The big advantage of PCP is flexibility. Factors such as your mileage and the size of your deposit will affect how much you pay each month. There is no obligation to buy at the end. You can simply return the car and, if you want to, take out a new PCP with a newer model.
This flexibility can mean extra restrictions on how you use and what you can do with the car. For example, any damages or additional mileage will affect the value of the vehicle. This is likely to mean additional fees if you end up returning it.
Hire Purchase (HP)
Another option is Hire Purchase (HP). Hire purchase is a type of secured borrowing that works in a similar way to a mortgage. You’ll pay a deposit upfront (usually around 10% of the value of the car) and then fixed monthly repayments over an agreed period of time. These repayments cover the cost of the car plus interest.
Like with a mortgage, you won’t actually own the car until you have paid off the loan in full. If you miss or fall behind on payments, you may lose the car. Sometimes there may also be a one-off purchasing fee to pay before you take full ownership.
If you don’t like the complexities of PCP or HP and prefer to keep things simple, another option is to borrow the money you need as a personal loan. This would let you buy the car from the dealer in full.
The advantage of this option is that the loan provider and car dealer are separate. This allows you to shop around and get the best deal for each. It also means that you only have to borrow exactly what you need and can use any savings you might have towards the cost.
The main downside of this approach is that this type of loan is unsecured. This makes it a higher risk from the lender’s perspective. It means that you may pay a higher rate, be able to borrow less, or be less likely to be accepted.
Finally, it’s worth considering whether you really need to borrow at all. The reality is that all forms of borrowing mean paying money in interest. That’s money which could be spent on other things.
If you can afford to wait before upgrading or save gradually so you can buy the car outright, it might end up making the most sense financially.