PCP vs HP vs Loan vs Cash vs Lease - What's the best way to buy a car?

PCP vs HP vs Loan vs Cash vs Lease - What's the best way to buy a car?

When choosing your next car there are so many factors to consider. And even once you’ve decided which car you want, you suddenly get presented with your next dilemma: how to finance it.

According to the Finance and Leasing Association, 88% of new private cars bought in 2017 were paid for with some form of finance.

There are six main ways you can go about obtaining your next car. Hire Purchase (HP), Personal Contract Purchase (PCP), Personal Loan, Credit Card, Lease, Cash

Hire purchase (HP)

HP is a very simple way of paying for a vehicle. You pay an initial deposit - usually around 10% of the value of the vehicle. You divide the remainder by the number of months in your contract (ie 48 months), add some interest - usually around 6-7% Annual Percentage Rate (APR) - depending on the market) and there you have your monthly payment. Keep an eye open for 0% finance deals too, this could save you thousands in interest over the course of the loan.

You won’t need to give the car back at the end of the period, so there’s no worrying about mileage or condition either. You will end up paying a great deal more than if you’d bought in cash, simply because of the interest, so it’s worth checking out the total amount to be paid before signing up. Also note, that until the term of your contract is up, you will not own the vehicle. This means you won’t be able to modify or sell it on until the end of the contract either.

HP Finance Example:

  • APR 7%
  • Price: £10,000
  • Cash deposit: £1,000
  • Term: 48 months
  • Annual mileage: 10,000
  • Loan amount: £9,000
  • Monthly payment: £216.00

Personal Contract Purchase (PCP)

PCP seems to be a favourite among dealers at the moment. It’s sort of a halfway house between hire purchase and leasing. Because dealers love this option so much you often get offered £1,000 or more off the purchase to take them up on it. Don’t be fooled, though, whatever they’re offering you, you’ll be paying more than that in interest over the lifetime of the finance agreement.

Here’s how it is structured:

You will pay an initial lump sum - usually around 20% or so of the value of the vehicle. You will then be given set monthly payments for a fixed period, ie 48 months. 

The main difference is that when your fixed term ends you don’t own the car. Instead you’ll be given two options:

  1. A pre-agreed final payment to purchase the car at that point - often referred to as the Guaranteed Minimum Future Value (GMFV)
  2. Simply hand the car back to the finance company

The reason the monthly payments are considerably lower than for hire purchase is because the total amount paid is offset by how much the car is worth at the end of the agreement. The loan amount is essentially the cost of car plus interest, minus the deposit and the GMFV.

Many people opt for PCP because of these low monthly payments and knowing the amount you’ll have to pay to buy the vehicle at the end of the contract upfront is helpful for budgeting.

Be mindful that you will have to adhere to pre-agreed terms such as a mileage per year and final condition of the car. Go over the mileage, or try to hand the car back in a poor condition and you’ll be charged additional fees.

If you buy the vehicle at the end, then the total amount paid will be roughly similar to that of a hire purchase plan.

PCP Finance Example:

  • APR 7%
  • Price: £10,000
  • Cash deposit: £1,000
  • Term: 48 months
  • Annual mileage: 10,000
  • Loan amount: £9,000
  • Monthly payment: £179.00
  • Optional final payment: £2,000

Personal Loan

Many banks offer personal loans for things such as home improvements and new cars. This is one option to consider as the money is rarely secured against your property or vehicle and tends to come with much lower interest rates than car finance.

Because the loan is also not secured against the vehicle you’ll need to have a good credit rating to get a decent interest rate. One of the reasons car finance such as PCP and HP has such high interest rates is because of their leniency for poorer credit ratings and higher frequency of payment defaults.

Essentially, if you qualify for a personal loan, it might be worth considering over car finance.

Once received you can simply buy the car outright. Of course, you’ll still need to manage and keep up with the monthly loan payments

One huge plus side to both personal loans and car finance is that they can actually have a positive effect on your credit rating - as long as you keep up the payments. Apply for too many loans though and this’ll show up too and will have a negative effect.

Credit Card

Depending on your credit limit, you may be able to pay for the vehicle, either in full or in part, on a credit card.

If you have 0% on purchases for a fixed term this could be a great way to finance your vehicle without paying any interest. Just be sure to pay the full balance off before the interest free period ends. Otherwise you’ll end up paying huge levels of interest. Alternatively you may be able to transfer the balance to another 0% interest on purchases credit card, but this usually incurs a balance transfer fee.

One major benefit of buying on a credit card is that even if you put just a small amount on it, then you’ll be covered by Section 75 of the consumer credit act. This means that if something goes wrong with the vehicle or the purchase then your credit card company may be able to help.

Be aware though that some dealerships won’t accept credit cards due to the high transaction fees, which can no longer be passed onto the consumer.

Lease / Personal Contract Hire (PCH)

With leasing you basically rent the car for a set period; usually 3 - 4 years. You will pay an initial deposit and then a set amount every month, like hire purchase.

One of the main advantages to leasing is that the car is always new, and is usually fully covered by warranty for the duration of the lease. Any issues or problems and you can rest assured it’s the problem of the lease company. Some packages also include servicing and vehicle tax as well. So shop around for the best deals.

The major difference between leasing and the other options is that you do not ever actually own the vehicle and at the end of the term you’ll have to hand it back. Like PCP, you’ll also have to abide by a pre-agreed number of annual miles, and the vehicle will have to be in good condition upon return.

Cash

If you have the capital available then buying a car outright with cash is a very good option. You’ll pay absolutely no interest on the price of the car, and you will have no monthly payments to worry about either.

You will need to have the full amount available in your account to complete the purchase. If your money is tied up in fixed-term savings accounts there may be a fee for withdrawing early.

Some people also have their money in Stocks and Shares ISAs so it may take a few days to a few weeks for your broker to sell your investments and return your cash to you. You’ll also stop earning any dividend payments your holdings may have been paying, and there will be no further potential capital gain on your investment.

It’s also worth noting that you have an ISA limit each year (currently £20,000 in 2019/20 tax year) and once you hit that limit you cannot pay into it until the next tax year. Therefore, think carefully before withdrawing from your ISA to pay for a car.

Summary

In summary, there's no right or wrong when it comes to financing your next vehicle, it just depends on your budget and financial situation at the time. Whichever option is best for you, don’t let the dealer persuade you. They’ll often have ulterior motives and will be pushing you towards the option that gets them the most commission.

And finally, haggle! Regardless of the method of payment, when buying a vehicle it’s always important to try to get as much off the price as possible. It’s factored into the sale price.

There’s always room for manoeuvre and the dealer would rather sacrifice a percent here or there to stop you walking out the doors and into the dealership across the road.

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