Hire Purchase (HP) - One way to buy a car on finance is through a hire purchase agreement. With HP, you’d usually make a deposit towards the car, and then make fixed monthly instalments. These regular payments are made up of the initial cost of the vehicle and the interest applied. Once you reach the end of the agreement, you’ll own the car outright.
As a hire purchase is a secured loan, your car will act as collateral against the cost of the finance borrowed. The benefit of a secured loan is that, because there is less risk to the lender, you’re more likely to be approved even if you have bad credit. The interest rates also tend to be lower than with an unsecured loan. Do keep in mind though that if you’re unable to keep to the agreed payments, the lender may be able to repossess your car.
If you want to keep the vehicle at the end of your term, HP is usually the better option. People looking into super car finance and classic car finance, for instance, probably wouldn’t want to hand the keys back when their agreement ended!
Personal Contract Purchase (PCP) - A personal contract purchase is similar to HP, with an initial deposit and then monthly repayments. The main difference is that, as you’re paying towards the depreciation of the car rather than the cost of it, once the term comes to an end, you’d need to make a balloon payment to own the car. This is to cover the remaining cost of the vehicle. PCP generally comes with smaller monthly instalments than HP, so can be a great option for someone with a lower budget.
As with a hire purchase, a PCP agreement is classed as a secured loan. Both of these types of finance are therefore a good option for people with a poor credit score. They can also work out cheaper than a personal loan, though this will largely depend on your financial history.
Personal Loan - A personal loan isn’t secured against the vehicle - you’d simply borrow the money and use the funds to buy a car outright. This of course means that you’ll own the car from the start, unlike a HP or PCP.
It’s important to bear in mind that because personal loans are unsecured, the finance provider takes more of a risk in lending to borrowers, as there’s no collateral. This essentially means that the interest rates are often higher, and it can be harder to get a personal loan with a low credit score.
Another thing to remember with personal loans is that you don’t have the option to part exchange your car. Many dealerships, with both HP and PCP, allow you to part exchange your car in order to reduce the price of your new vehicle. The value of your old car is essentially deducted from the cost of the new one.
However, you may be able to get a good deal selling your old car instead, especially if you use companies like Motorway. They can sell your vehicle whether it runs or not, in as little as 24 hours.