Finance, PCP, HP, personal loan, which is best for you?

In the modern age we’re very blessed to have finance options available on virtually everything we own. Your phone contract , a sofa , a big telly, your car the list goes on. Now these aren’t just beneficial (dependant on your usage) they can also land you in a lot of financial trouble if not used correctly. Today I’m going to explain how they work, the merits of each and which example may work best for you. Car purchases are the second largest purchases most of us will ever make in our lives after mortgages. So it’s important to get the financial commitment sorted in a way that’s beneficial and affordable.

PCP (personal contract purchase)

What is a PCP? Well it’s a convoluted way of renting a car basically. You usually pay a deposit, select a term (3-5 years typically) and you use the vehicle as much as you’re entitled too (mileage limits apply). At the end of the agreement there is a settlement figure (balloon payment) if you don’t pay this fee you must return the vehicle. You have no rights to keep it. PCP is more expensive than hire purchase as your balloon payment will always be higher than the vehicles residual value. You must also remember you’ve paid a deposit up front , then 36-60 months at a set amount, with nothing to show for it if you return the vehicle. You can use the vehicles value as a deposit on another but again you’ll just be renting another car. In my opinion PCP deals are a great way of throwing money away. Yes you get a new car (up-to 3 years old) but it doesn’t belong to you and you must give it back or pay a lot more than it is worth. There are also penalties for going over your mileage allowance so if you return the vehicle with too many miles you must pay for the extra.

HP (hire purchase)

Hire purchase requires a good credit score to get the best rates. First of all you will need a sizeable deposit 10% of the vehicle or more is common. The remaining balance is then split across the term of the loan, up-to 60 months usually. You must make all of the payments and pay the final “option to purchase fee” to own the vehicle outright. Whats good about Hire Purchase is when you’ve paid 50% of the vehicles value you may be able to return it, without damaging your credit score. This offers greater flexibility for your payments and the terms of contract. HP deals typically do not have mileage limitations again offering freedom for how much you use the vehicle. Your monthly costs directly correlate to the size of the deposit you pay , bigger initial deposit smaller monthly cost.

Car finance

So straight up car finance a risky place to be, I fell victim to it once before (never again) and you could to. Car finance is a dangerous game as there’s not a minimum deposit required. As long as you pass the basic credit check you could be loaned the entire value of the vehicle. Which is often overpriced just in case you can’t keep up with your repayments. So say for example you spend £9950 on a car. If you pass the credit check and sign on the dotted line, your vehicle is likely worth £5-6000 and your monthly payments could be charged at 8-12% interest depending on your credit score. This is where it is imperative you learn about gap insurance. What is gap insurance? Well they cover you just in case you write-off your newly financed car. Because interest on the loan and the cars value are substantially less than the amount borrowed, meaning you could be liable to pay the additional costs if you had an accident. (Car worth £6000 you paid £9950, chances are you don’t have £3950 to cover the “gap”) hence the term gap insurance. You must also bear in mind that without a deposit your monthly costs will be much higher and likely drawn over a longer term 48-60 months or so. That is a long commitment on a depreciating asset. You will also struggle to sell a car on finance because it is not yours. Therefore when sold you must send the funds immediately to the finance company to pay the “settlement figure” this the amount left on your loan minus the interest for the amount of months you cut it short by. (Pay it off halfway through, big reduction, leave it late there’ll be almost no difference).

Personal Loan

Ah the god of lending, while hard to get at the best rates (around 3%) personal loans will open many many doors for you. Build up your credit score by registering on the electoral role, having a credit card , history of lending (a phone contract should suffice) and good discipline with repayments. Once you’ve achieved this you’re now in a strong position to borrow. Go to your bank first because they know you best and all of your money is with them especially your annual salary. Use credit checks like Experian to keep track of your score (you want to be above 960 and in the excellent category). However price comparison sites can use a soft search to see the rates you’re likely to be offered. Obviously the lower rate the better. You can take the loan out depending on the amount over 12-96 months. The freedom here being, you can make over-payments or settle the loan entirely at any time. Which is often a big boost for your credit score. Because the loan is only attached to yourself you can chop and change cars as many times as you like while adding savings or other monies to each transaction and with luck you will upgrade each time.

So there’s a brief explanation of how the main financing methods work. It all depends what you’re looking for in a car and whether you want to own one long-term, chop and change or just simply have a vehicle you can use. I hope this helped clear up a few things as not all car dealerships are as honest as they should be.

Published by Sam Busby

a big nosed bearded idiot who likes to write about cars. Lucky enough to have owned a few quick ones too.

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