PCP or personal loan? The pros and cons explained…

Consider your car finance options carefully in order to get the best value for your money, writes Geraldine Herbert

Unless you are a cash buyer, when buying a new car the chances are you are likely to consider opting for a personal contract plan (PCP) or borrowing the money from a bank or credit union. Below are some things to consider before you commit to either.

Personal Loan

The simplest way you can finance the purchase of a new car is by getting a personal loan either from your bank or credit union. You can typically take out this type of loan with repayment terms ranging from three to five years and you can borrow the amount you want to pay for the car or make up any shortfall with savings or your car’s trade-in value.

What to consider: The best way to compare loans is on APR – the annual percentage rate – as essentially this is the real cost of borrowing money because it includes interest and charges. The lower the APR, the better the finance deal.

Pros: The main advantage of a bank loan is that you own the car and therefore you can, if necessary, sell your car to repay the loan should you fall behind on your repayments. A credit union loan affords further flexibility as there are no hidden fees, admin charges, transaction charges, set-up costs or balloon payments, plus you can pay off your loan early, make additional lump-sum repayments or increase your regular repayments, without a penalty. Some lenders may charge extra for paying back faster. Another advantage is that you essentially are a cash buyer so this should give you some scope to negotiate a higher discount.

Cons: As with all financial agreements you need to ensure that you only borrow as much as you can afford to repay.

Personal Contract Plan (PCP)

PCPs are a form of car finance based on a hire purchase (HP) agreement. However, unlike HP or a bank loan the repayments are typically lower, as you are paying off the depreciation of the car, and not its entire value and at the end of the agreement you have the choice of whether to make that final payment to own the car or not. The deposit is typically between 10pc and 30pc of the value of the car, depending on the finance provider. Your deposit can be paid in cash or if you already own a car, you can trade this in for part or all of the deposit, depending on its value. PCP agreements are usually made for terms between three and five years. A guaranteed minimum future value (GMFV) represents what the car will be worth once the PCP ends – and this, plus the deposit you choose to put down, is taken away from the total cost of the car, and you pay monthly payments (plus interest) on the remaining balance for the term of the contract.

What to consider? PCP adverts on the radio or newspapers e.g. drive away in a new car for €200 a month are based on a 30pc deposit.

Pros: If you compare financing the same car on a PCP to another loan, the big difference is that you are paying off a much smaller amount of money. Also if your car is worth more than the GMFV, you will have built up some equity towards your next deposit and finally you can change your car for a new one every few years.

Cons: Generally, if you are intending to own the car at the end of the contract then PCP is not the ideal form of finance as you will need to pay a large final balloon payment (the GMFV) at the end of the contract period. Also if you miss payments the finance provider can and will take the car off you or if you cancel your contract and return the car you’ll probably have to pay a significant fee. It is your responsibility to service the car regularly and to stay within the agreed annual mileage.


Geraldine Herbert

12th June, 2018

Author: Geraldine Herbert

Motoring Editor and Columnist for the Sunday Independent and editor of wheelsforwomen. Geraldine is also a regular contributor to Good Housekeeping (UK), EuroNews and to RTÉ, Newstalk, TodayFM, BBC Radio and Vigin Media. You can follow Geraldine on Twitter at @GerHerbert1

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