Ultimate new car finance guide
Bank loans, hire purchase or a personal contract plan? CarBuyer investigates.
Most UK car buyers borrow at least some money to pay for their new car. Should you choose a bank loan, hire purchase or a personal contract plan?
Below, we explain the key differences between the various types of loan - as well as the relative advantages and disadvantages.
You can get personal loans from high-street banks, the Post Office and online lenders. They offer fixed-cost monthly payments and allow you to buy a car without putting down a hefty deposit.
- There are two types of personal loan: secured or unsecured.
- Unsecured loans are more popular, as applications are judged largely on your credit rating.
- Secured loans tend to take longer to set up, with some form of collateral required – often your house.
- Interest rates, often listed as APR can vary greatly so make sure you get an individual quote showing the exact amount you will be charged as well as the total amount repayable.
- The Annual Percentage Rate tells you how much you’re paying in interest – the lower the APR, the better the deal.
Hire Purchase (HP)
Hire Purchase agreements, often referred to as HP, are arranged by car dealers and will provide competitive rates on new cars via deals backed by the manufacturer.
(N.B On used models interest rates are typically higher than those offered on new cars.)
- Unlike a personal loan, money is secured against the car meaning you don’t own it until the final payment is made.
- Hire Purchase agreements require a deposit – usually at least 10% of the invoice price – although you may find some special offers allowing zero deposits.
- If you have a car to part-exchange then its value will count towards a deposit.
- The longer the agreement, the lower the monthly payments will be, but you’ll end up paying more interest.
Personal Contract Plan (PCP)
A Personal Contract Plan is similar to a Hire Purchase agreement, but typically runs for shorter periods– around two or three years.
- Your PCP plan will attach a figure to the predicted resale value of your new car, based on your predicted annual mileage.
- Your monthly payments are then calculated on the difference between this future value and the invoice price, so payments are lower as a result.
- At the end of the agreement, the borrower can choose to pay the final instalment and keep the car, hand it back and pay nothing, or trade it in and start all over again.
- When taking out a PCP be truthful about your annual mileage – if you exceed the agreed mileage you will be fined at the end of the contract.
Why not try CarBuyer's online car finance calculator, provided by our partners Finance-a-car.
We've also put together a list of the best cars available for less than £150 per month.