Which Option is Best – Personal Loans, HP or PCP?

When it comes to financing a car, it is quite hard to decide on the best deal. Various direct lenders are offering three types of car financing options – personal loans, hire purchase (HP) and personal contract purchase (PCP).

Each financing option has its own pros and cons. No matter which option you opt for, the cost will be spread over a couple of years. Buying a car is no simple decision. Nothing can be a cheaper option than paying outright, but it requires a lot of efforts to arrange that amount.

Of course, you must have some money set aside to pay as a down payment. The bigger the down payment, the lower the cost of the loan will be. Arranging a more substantial deposit is essential if you are looking for bad credit car finance deals with instant decision. However, before you choose any funding option, you should calculate the total cost with the help of online calculators.

Personal loans

Car loans are generally secured loans. You cannot get the title of the car unless you make the full payment. If you take out private loans, you do not need to fear to lose your car as it is an unsecured loan.

You will borrow a set amount of money that you are supposed to pay over an extended period along with interest. If you have a good credit standing, you will get the loan at affordable interest rates.

You can apply for a personal loan despite bad credit, but you will have to arrange a larger deposit size.

Pros:

• It is the cheapest alternative if you are paying outright.
• You will get money immediately by filling out the application form online.
• You will get competitive interest rates despite bad credit rating.
• You do not need to put your car as collateral.

Cons:

• Monthly payments will likely be higher than other financing options.
• You may not be able to borrow unless you pay off the loan.

Hire purchase (HP)

HP refers to the contract that allows you to pay a deposit of 10% and rest over an extended period in monthly repayments. You will pay down directly to a car dealer. Unlike personal loans, you will not get the title of the car unless you settle all your dues.

You can pay a bigger deposit that will reduce the size of your monthly repayments. HP is the best option when you need to finance the gap between the worth of the car and the amount you have put aside. Further, you should seek such contracts if you are buying a new car.

Pros:

• It is convenient to sign the contract.
• The minimum deposit size is 10%. Under some circumstances, you can get it even if you have 5%.
• The term of the contract is between 1 and 5 years.

Cons:

• You do not own the car unless you make the final repayment.
• It can be an expensive option.
• Other borrowings might be affected.

Personal contract purchase (PCP)

PCP acts as an HP. It also allows you to pay a deposit size of 10%. The only difference is you will pay down smaller monthly payments, but the last amount will be much larger. You can address it as a balloon payment.

Like in the case of HP, you will have less to pay each month if you make a larger down payment. Remember that if you sign in the PCP, you will not be paying for the worth of the car but the value for its depreciation.

Therefore, you should get a loan for the difference between the price of the car and the estimated amount of annual mileage over the term of the contract.  

Pros:

• Monthly payments are lower than HP.
• The repayment term is between 2 and 5 years.
• You have two choices – you can make the final payment and get the title, or you can return the car at the end of the term.

Cons:

• Exceeding the mileage will cost you additional charges.
• Any damage or wear and tear will add up the cost.
• The total amount is likely to be higher than HP.

Now that you have got to know the difference between each type of car financing options. Consider your financial situation before making a final decision.