If you’re buying a new car you could pay cash, take out a personal loan, opt for Hire Purchase (HP), Personal Contract Purchase (PCP) or a leasing deal.
The right option for you will depend on your credit history, affordable repayments, income, aspirations and the mileage you’ll do each year.
In this guide
|Key considerations||Car loan||HP||PCP||Leasing (contract hire)|
|You choose your car|| || Restricted|| Restricted|| |
|Outright ownership from start|| || || || |
|Deposit required|| || Deal dependent|| Deal dependent|| Deal dependent|
|Big Final payment|| || || || |
|Secured against the car|| || || || NA|
|Depreciation risk|| || || || |
|Mileage restrictions|| || || || |
|Wear and tear fines|| || || || |
Although your purchase options are restricted with HP and PCP, you should still be able to choose a car through almost any reputable dealer. If they can't finance the car you've found, they'll probably be able to source an almost identical one and possibly at a better price.
Focus on unsecured car loans
Unsecured loans enable you to borrow between around £1,000 and £50,000 over periods of 1 to 7 years. The rate you’re offered depends on your credit profile, with the most attractive deals only for those with a squeaky clean credit history.
The longer you take to pay off the debt, the lower the monthly costs, but the more Interest you’ll pay in total. The table below hows the difference in monthly cost of borrowing £5,000 @ 6.9% APR Representative over 3, 5 and 7 years.
|Period||Monthly cost||Total cost of borrowing||Total cost|
The APRs (annual percentage rates) of interest will usually be described as ‘representative’, which means that a minimum of 51% of successful applicants must be offered the advertised rate.
If you have an excellent credit history and a high income, you could be offered loans with rates around 3% (on lending between £5,000 - £15,000). But then again, a blemish on your history could see the rate soar.
However, without doing an eligibility check, it’s almost impossible to know what rates you’ll be offered and whether you’d be able to get cheaper lending using another finance method.
A major advantage of taking an unsecured loan is that you own the car outright from the start. So it’s yours to use as much or little as you like, with no restrictions on when you sell it either.
Focus on Hire Purchase
If you buy a car on HP, the loan will be secured against the car, which will legally owned by the lender until the finance is paid off in full. As a result, rates are not as dependent on your personal financial profile and therefore less sensitive to it. How it works
Although you won’t be the owner of the vehicle, you will be the registered keeper and responsible for its insurance and maintenance. Fail to keep up your repayments and the lender can take possession of the car without legal action until you have paid 50% of the finance back
As the finance company will become the ‘legal owner’ when you purchase your car, so they will want to minimise the risks of:
- You immediately reneging on your credit agreement
- The car not being worth the amount you paid for it
to mitigate these risks, HP and PCP providers will usually insist on taking a deposit of up to 10% of the purchase value and buy through a reputable dealer.
If you haven’t already found a vehicle you want to buy, or the dealer isn’t acceptable, most HP providers will be able to provide an almost identical car and possibly at a better price.
Dealers like to provide their own finance
If you go to a dealer, it’s in their interests for you to take one of their finance deals as:
- The dealer will receive a commission, up to 8% of the finance's value!
- The sales assistant will get a portion of that commission
- It has often been alleged that they can amend the APR to give themselves more or less commission.
Remember, you are not obliged to take their finance, but indicating you're intending to may allow you to negotiate a better price.
Focus on PCP
PCP is a great way to drive an expensive car for an affordable monthly cost. The balloon payment provides you with a guaranteed future value of the vehicle and so it can be profitable to hand back the vehicle at the end of the term if the car’s value is significantly lower than the balloon payment.
Table showing the relative costs and repayments of an unsecured car loan vs PCP either borrowing the same amount (£15,000) or having the same repayments with the interest rate @5.9% and the borrowing over 48 months.
N.B. The balloon payment will be vary according to the car make and model as well as the agreed mileage.The figures in the table are for illustration purposes only
|Personal loan/HP||PCP borrowing same amount||PCP same monthly cost|
|Value of vehicle||£15,000||£15,000||£22,450|
|Cost of interest||£1,826||£2,326||£3,697|
If you hand back the vehicle, dealers may offer a generous valuation on your vehicle, allowing you to put the extra cash into a deposit on a new PCP deal. This is often the best outcome for them, as even if they don't make any money on the car itself, they won't necessarily mind as they will make money on the new PCP deal you take out and on a new PCP deal to the next owner of your old car.
One of the biggest issues with PCP is that you can be fined for going over the agreed mileage or if the car has suffered ‘excessive’ wear and tear. This can mean that even if you are handing the car back, you could still have some hefty bills to pay.
Logically, you might think that with the same APR on a PCP, HP and a loan, PCP would give you a lower monthly payment, provide residual value insurance and the same total cost, but you would be wrong.
The interest costs on a PCP deal with the same APR are significantly higher than an HP deal or a loan for the same ‘principal’ amount as the amount of debt you are paying off each month is lower and therefore the amount of interest on each repayment will be higher, even at the same interest rate.
- Price of the car: £20,000
- Interest rate: 9.9%
- Your deposit: £2,500
- Loan amount: £17,500
- Months to repay: 47
- Monthly payment: £249.30
- Final payment: £9500
- Total cost of the car: £23,720
An HP deal or unsecured car loan for the same car with the same deposit and APR over the same period would cost £1,900 less than this PCP deal.
The bigger the balloon payment, the longer the term and the higher the APR, the greater the difference will be between the cost of PCP compared to HP or loans.
Focus on Personal Contract Hire - PCH
A PCH agreement is a leasing contract, this means that you will never have the right to purchase the vehicle, it is as a long term rental contract with conditions attached. If you wish to end the contract early, you will probably have to pay for the full term in exactly the same way as you do with most mobile phone and broadband contract.
why get a car on PCH
For many the best feature of PCH is the convenience, at the end of the contract you hand back the vehicle and assuming you haven’t damaged it and not done over the agreed mileage then you’ll have nothing more to worry about.
If you fancy changing your vehicle every couple of years, can manage the monthly costs and don’t want to worry about depreciation, then PCH may be the best option for you, but it’s also unlikely to be the cheapest option too.
Which is best
Personal loans - the absolute cheapest if you've perfect credit history
If you can afford the monthly repayments on an unsecured car loan, the car will not be secured against the loan and if you have difficulties with repayment, the finance company will not be able to take possession of it. If you have an excellent credit file and good affordability, the APR will be lower than on any HP or PCP deals for secondhand cars, so from a straightforward cost perspective it will be the cheapest in these circumstances.
Hire purchase - cheapest for prime and near prime customers
If you aren't a super-prime customer, but can afford the monthly repayments for HP, this will be the next cheapest option (assuming the APRs are the same on HP and PCP), but if you fail to make your payments and more than 50% of the repayment amount is outstanding, the finance company can legally take possession of your vehicle without a court order.
PCP - best for those who can't afford monthly payments on loans and HP
If you can’t afford the monthly repayments for the car you want on HP or you want to drive a nicer car than you could ordinarily afford, PCP offers a great solution. Like HP, the finance company will be able to take possession without a court order if you fail to keep up your payments and there is still over 50% of the total borrowing amount outstandng.
Although it would cost almost £2000 more than an equivalent HP deal, this is only £42 per month, which for many is a worthwhile trade off for driving a car they’ll enjoy.
(GAP) Guaranteed Asset Protection Insurance
If you purchase a car on PCP or HP without a deposit there is a good chance that the car's value will be less than outstanding finance for the first couple of years of the finance agreement, in the event of an incident you'll be liable for that difference.
GAP insurance will cover the difference between your car's value and the outstanding finance, whether it is worth it will depend on your personal circumstances and your attitude to risk... Scenario
'Joe' buys a new high spec Hyundai for £20,000, on a HP deal that will ultimately cost £24,900 (APR of 12% on a 48 monnth contract), without paying a deposit.
- After 3 months, 'Joe' has an accident and the insurance offer a total loss settlement value of £17,000
- The car finance company requires a settlement figure of just over £19,150
- 'Joe' now owes the finance company £2,150
Had Joe' taken gap insurance that would have cost around 0.5% of the purchase value (£100), he wouldn't have had to pay a penny and if the finance deal had been on PCP the settlement amount would have been higher as less interest would have been paid off.