Are you looking to buy a new car? You have a couple of financing options to choose from, but if you want to save some money, you must carefully gauge the pros and cons of each available option. Particularly, there are four types of financing options – personal contract purchase (PCP), hire purchase (Hire Purchase), Personal Contract Hire (PCH) and personal loans (auto loans).
Car financing options with their pros and cons
Here are the upsides and downsides of car financing options so you can easily decide which one best fits your needs and budget.
Personal contract purchase (PCP)
A PCP deal covers only the depreciating cost of your car. In other words, you will pay off the sum equivalent to the value it loses until the contract ends. When the contract ends, you can own the car by paying one balloon payment. The payment length of this contract lasts up to three years.
Pros:
- Flexibility: At the end of the contract, you have an option of either owning your car by making a large balloon payment, getting a new PCP or simply returning your car.
- Lower deposits: the initial deposit could be as little as 10%. However, some dealers may still expect you to put down 15% in case your credit score is bad.
- Manageable monthly payments: as you will have to pay towards the depreciating cost of your car, monthly instalments will be smaller.
Cons:
- Limited choice: PCP deals are usually available on newer cars. For a used car, you should consider other alternatives.
- Expensive financing method: even though it just covers depreciating costs, the deal proves to be very expensive because of add-ons. You still cannot own your car unless you make a large balloon payment that can blow your budget.
- Mileage cap: you will be restricted about the mileage you can cover. In case of additional mileage, you will have to pay penalties or extra fees.
Hire purchase (HP)
HP is different from PCP as your monthly payments will include both the value of the car and the interest. However, you will own it outright only at the end of the contract after the settlement of all payments.
Upsides:
- Flexibility: you have the right to choose either a longer or a shorter repayment period. If you want to reduce the size of monthly instalments, you can choose a longer repayment plan.
- You will own your car: on contrary to PCP policies, HP will let you own your car right from the moment your contract ends.
- Easier for bad credit people: as HP is secured against your car, it minimises the risk of a dealer, and therefore, they might be more open to accepting applications from subprime borrowers.
Downsides:
- Higher monthly payments: compared to PCP, the size of monthly instalments will be higher. If you choose a longer repayment plan, reduced monthly payments will increase the total outlay due to accrued interest.
- Increased cost: Compared with personal loans, you will discover that HP is more expensive.
- Risk of repossession: as your car is secured, it is subject to repossession in case you fail to repay the debt on time.
Personal contract hire (PCH)
This financing option lets you hire a car in exchange for regular monthly payments. This is known as leasing or long-term car rental. Note that it is not a loan. You do not owe the car, nor will you ever owe it after the end of the contract.
Pros:
- Flexibility: the rates are fixed in advance. There will be no change in your monthly payments throughout the contract. However, rates will be revised when you renew your lease agreement.
- More affordable: as you are not buying a car at the end of the contract, monthly payments will be smaller and much more affordable than HP and PCP.
Cons:
- Upfront payment: the upfront payment is to be made at the time of signing the contract. It will be equivalent to at least six monthly leases.
- Not an option for subprime borrowers: this is the best option only for those who have a high credit score. If you get a car on a lease with a poor credit rating, it will be very expensive.
Auto loans
Auto loans are personal loans that are available from a direct lender as well. You will have to pay a deposit worth 10% of the sticker price. The repayment length will be three years or more, depending on the loan size and your repaying capacity. Each monthly instalment will go towards both the principal and interest. You will be free to use your car the way you want, but your lender will have the right to take back your car in case you fail or refuse to make payments.
Advantages:
- Flexibility: you can choose either a smaller or more extended repayment period depending on your budget.
- No mileage restrictions: your lender will not impose any restrictions on mileage. It is your car, and you are absolutely free to use it.
Drawbacks:
- Expensive: auto loans are expensive if your credit report is not up to snuff. You will have to pay down a very high interest rate.
- Debt burden: Normally, the repayment length cannot exceed three or four years, even if you choose a more extended repayment period so that the monthly payments will be more significant.
What is the best financing option for your car?
While deciding which of the car financing is suitable for you, you should look at your budget and needs. Financing options from car dealers are generally more expensive than auto loans. Therefore, if you are looking to get the best car loan in Ireland, you should consult a direct lender if you want to own the car.
