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Picking the right car finance option for you

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There are lots of decisions you need to make when buying a new car: for example, what make and model, petrol or hybrid, and whether to opt for new or second-hand.

But it’s easy to forget one of the trickiest choices: how to finance the purchase. From PCP to HP it can feel like a confusing alphabet soup of options.

Here we explain what’s available to help you get the finance plan that suits your situation, whether you’re after a family hatchback or dream sports car.

First off, if you have savings in the bank, this will normally be the cheapest approach – as you avoid all interest charges. But that’s not an option for many, so here are the alternatives.  

Unsecured Personal Loan

With this approach, you’ll take out a loan, with a bank, or a finance company like Zopa. The money is transferred into your account, and then used to pay for the car.

The loan is repaid in monthly instalments over a fixed term, typically one, three or five years.

The interest rate you get will vary. It’s dependent on the term of the loan, the lender, and personal factors like your credit rating. The lowest rates will normally be offered to those with the best credit scores.

It’s important not to ignore the small print, some loans will have penalties for those who want to pay off early.

If you do go for this route, be sure to shop around in advance to make sure you’re getting the best deal.

The advantages:

  • You own the car from day one, so are free to sell it at any time
  • Can mix and match with savings to fund part-purchase
  • There’s usually no upfront deposit to pay

But remember:

  • It’s worth working out how this will fit in a monthly budget, as payments can be higher than other finance options
  • Your car’s value will drop over time, so it’s likely to be worth significantly less by the time the loan is repaid
  • Missing a repayment can hurt your credit score

Hire Purchase (HP)

Next up, we have hire purchase arrangements. These are available from car dealerships and finance companies, like us here at Zopa.

HP has similarities with an unsecured personal loan. Plans can be fixed over different time frames and the balance is paid back – plus interest – in monthly instalments.

However, with HP the debt is secured against the car. This means you won’t own it until the final payment is made. It also means that if you don’t repay the loan, the car can be repossessed. You’ll normally need to pay a deposit at the outset, though this isn’t always the case with Zopa.

The advantages:

  • Monthly costs may be lower, as the loan is secured against the vehicle
  • Can mix and match with savings to fund part-purchase
  • Through voluntary termination, you can cancel your agreement early once you’ve paid half the agreed amount

But remember:

  • You don’t own the car until the loan is paid off
  • You can return the car during this period, but then will have to repay any outstanding balance.
  • If you can’t meet the repayments you will lose your car
  • You may need to fund an upfront deposit

Personal Contract Purchase (PCP)

And finally, we have PCP. This is typically provided by car dealerships and some finance companies. At Zopa, we don’t currently offer PCP. With this option you pay an upfront deposit – usually 10% – but then a far lower monthly payment over a fixed term, usually one to four years.

At the end of this period the driver has two options: they can pay a lump sum — known as a balloon payment — and own the car outright, or they simply hand the keys back, and take out another PCP on a different model.

These contracts are based on something called a ‘minimum future guaranteed value’. This is set at the start, and will be partly based on the annual mileage you think you’ll drive. It is important to stick within this limit and ensure the car is regularly serviced and kept in good condition, otherwise you could be forced to pay out for extra charges at the end.

PCP can be a good choice if you get bored with your car easily and like to change things up every few years. If you want to own the car at the end, a hire purchase agreement will probably be more up your street.

The advantages:

  • PCP tends to have lower monthly repayments, as you are not paying for the full cost of the car over the term
  • Can work out cheaper for those who switch cars regularly
  • Through voluntary termination, you can cancel your agreement early once you’ve paid half the agreed amount

But remember:

  • You’re paying finance costs on a car that you may never own
  • Over the long term these can prove more expensive, particularly for those who want to keep the car at the end
  • You could end up tied in with a particular car dealership, if you can’t afford the final balloon payment to buy the car outright
  • If you can’t meet the repayments you will lose your car
  • There are mileage restrictions on how far you can drive
  • An upfront deposit will probably be required