Buying the car outright
If you have the money to spare, buying a car outright can be a cost effective alternative as you will not be
making any interest payments – the price you negotiate is the price you pay. You also have the
advantage of owning the car outright from the start but it will be a large capital outlay with no long term
Hire purchase HP
This has long been the traditional way of financing a car and is often arranged through a dealer. You can,
of course approach car finance companies direct and it will certainly be beneficial to get a broad range of
quotes. In principle you are basically hiring a car which comes with a “right to buy” – but remember you
do not own the vehicle until every repayment is made. HP agreements can be quite flexible and the rates
fairly competitive but not as good as a personal loan from the bank and the monthly payments will be
higher than a PCP. Obviously if you do not keep up with the payments then the car can be repossessed.
Personal (car loan)
Basically you already have the money for a car loaned to you by a bank or building society before you
venture forth to the car dealer. You buy the car outright and the repayments are made to the loan
company. As always it pays to shop around. One of the advantages is that the loan is not secured against
the vehicle so it‟s yours to sell when you wish and generally personal loan rates are quite favourable. If,
however, your credit rating is not so good the monthly payments may be quite high.
With a car lease you will usually pay a monthly sum over a two to four year term and at the end of the
agreement you simply give the car back. Think of it as a (very) extended car hire as the car never belongs
to you although some leasing some leasing companies will give you the option to buy the car at the end
of the term. This option generally only requires a small deposit and at the end of the lease you just walk
away (usually into another new car). Some people however, may not like the idea of never taking
ownership and there will be a mileage limit on the lease with charges levied for exceeding it.
Personal Contract Plans PCP
Personal contract plan (or PCP), is a similar process to hire purchase but you don‟t buy the car at the end
of the term. Instead the manufacturer/dealer works out how much the car will be worth at the end of the
term and you pay off the difference, plus interest, known as the “balloon payment” Minimum Guaranteed
Future Value (MGFV). At the end of the term you can buy the car outright, walk away or use the
difference as a deposit on your next car. PCP‟s offer lower monthly payments with maintenance charges
often included and they also have some flexibility in that if the car is worth more than the predicted value
you can sell it on; if it‟s worth less you can hand it back to the car finance company. Again there will be a
mileage limit that needs to be adhered to and although the monthly payments will be lower a PCP can
work out more expensive than HP over the full lifetime of the loan.
Some other important things to remember:
Always ask for the “total amount payable” to be made clear. This is the total cost to acquire the car after
all interest payments and additional fees are included. Also be aware of additional charges – such as
administration and documentation fees that can be added to the total package and increase the car
finance company‟s profits.
Most importantly be wary of taking on more credit than you can actually afford. It is never a good idea to
extend your mortgage to finance a car as you will end up paying far more in the long term. Always think
about what you can comfortably manage on your budget. Most car dealers and finance companies will
provide an online car loan calculator so you can work out the affordability and it‟s always best to build in a
comfortable “affordability cushion” in case your circumstances change.