Hire purchase (HP) and personal contract purchase (PCP) are two types of car finance deals available from car dealers. While you have an option to take out an auto loan from a direct lender, people are becoming keener on preferring PCP to any other types of financing deals. The most common reason is that it is making cars more affordable than ever.
If you are not able to shell out an inordinate sum of money for your new car, you can use this deal. Unlike hire purchase and personal loans, you pay every month to cover the depreciating cost of the car until your contract expires, and then you can buy it off by either making a full balloon payment or simply taking it back. The third option is exchanging your old car for a new one at a new PCP contract.
In times gone by, these sorts of deals were aimed at large companies with huge fleets of cars. With PCP, they could get new cars whenever they wanted and offload them within a span of two or three years. Over time, these deals have captured the attention of many people, begging the question of whether they are actually safe.
Are PCP deals throwing you into a cycle of debt?
Of late, PCP deals have hit an all-time high in sales, which has raised some concerns about the nature of deals. According to the FCA, a lack of transparency and irresponsible lending could be reasons for a record-breaking demand for these deals.
Every year, you will notice an added surge in the number of cars moving on the road in the UK, and that is because PCP offers you the opportunity to get a new car by rolling over the residual value of your previous car. This is how you keep paying a smaller monthly instalment to cover the depreciating cost and enjoy driving without owning it by making a balloon payment. Monthly rental payments can easily fit into your budget.
Another reason PCPs are becoming widely popular is that they are way cheaper than traditional financing options like HP. With HP, you do not have to make the balloon payment, and you will own your car at the end of the contract. A balloon payment is to be made to own your car under a PCP deal. Further, there are added restrictions on mileage. If you are planning to own a car at the end of the term, HP is more budget-friendly than PCP.
PCP may not be that affordable
What if you realise that you do not need this car while you are in the contract? Your dealership company will ask you to clear the outstanding amount because the deal is not over yet. The cancellation penalty will be so high that you would end up paying more than the sticker price of your car if you bought it outright. So, cancelling your PCP contract is not a cinch, and if you try to do so, you will be imposed very high penalty. Once you get into a PCP contract, you cannot get out of it. It is possible to escape hefty penalties when you are close to the end of the contract, say in the third or fourth year, but more capital is outstanding in earlier years.
Some borrowers have felt that walking away at the end of the contract is not as smooth as it can be. Car dealers start calling them up a couple of months before the end of the contract to propose new enticing deals. It is easy for them to talk you into accepting proposed new deals, and as a result of that, you keep having a new car on and on.
Is there any affordable financing deal?
The FCA regulates PCP, so you have plenty of protection. They are more affordable than HP as long as you do not have to own your car at the end of the contract. Personal loans are also an option you can consider. These loans work the same way as HP but are more affordable. These loans are available from direct lenders. Chances are you get approval with a smaller down payment.
However, if you are looking to apply for a car loan with a bad credit rating, interest rates will be slightly higher, and you will have to pay down a larger deposit, but in spite of that, you will get a more competitive auto loan.
At the time of taking out an auto loan, you should carefully analyse which one suits your deal. PCP offers a smaller monthly payment. Do you think you can stick to payments in case you lose your job? What if your credit score is bad? Can you still get a cheaper deal? Can you manage the payments with urgent loans for bad credit from a direct lender?
If you want to own your car, choose between HP and personal loans carefully. Although personal loans can be more affordable than the former, it is not set in stone that you will always get the best deal. There are a lot of factors that decide whether you will get approval for the best rates. Monthly payments will be bigger because of their amortised nature. Will you be able to keep up with payments in case of unexpected changes in your financial situation?
Bear in mind there is no sort of thing like guaranteed car finance for bad credit in the UK. Car dealers will consider many factors and then you will get the nod. Whatever the car finance deal you opt for, make sure it works in your favour.
The final word
PCP deals are inexpensive because you have a choice to take back the car if you do not want to own or you can exchange your old car for a new car. However, these deals are not worth using if you want to own your car at the end of the contract because otherwise, this will turn out to be the most expensive deal. If you use these deals responsibly, there is no risk of falling into debt.
Anna Johnson has more than 11 years of experience in direct lending industry of the UK. She is the Senior Content Editor at 24cashflow where she is leading a large team of loan experts. During her career, she has helped the loan aspirants to use the particular loans in the best way and improve their financial lives and status.
Anna Johnson is known for her in-depth research of the UK loan marketplace, as she has worked with many major lending firms in her career. During her educational phase, she has done a research on ‘Finance Fundamentals for Growing Business’.