Should you opt for a hire purchase agreement or arrange to buy a car by using a personal loan? What does PCP stand for, what does it involve, and what is the difference between that and a leasing plan? Interested in seeing what finance options are available to you?
In this helpful guide, we talk you through each type of car finance to help you understand what you’re agreeing to before you sign on the dotted line.
What is a hire purchase agreement?
Hire, then purchase
If you break down the name, you can see what is meant by the term hire purchase (HP). The first part of the term, hire, reflects the fact that you initially hire the car from the finance company, while the repayments are being made. Then at the end of the agreement, you have the option to purchase the vehicle.
Set monthly payments
When you sign up to an HP agreement, you make a set number of monthly payments to the lender over a pre-determined period of time - usually several years. When all the payments have been made, you can opt to own the car if you wish.
Unlike some other forms of car finance, a hire purchase agreement allows you to be named as the car’s registered keeper - so although you wouldn’t fully own the car until the finance has been settled, you are recognised by the DVLA as its registered keeper. As such, your name will be on the registration documents.
The final fee
By the end of the HP term, you will have paid for the car but you need to fork out an admin fee if you want to own it. This can range from as little as £1 up to several hundred pounds. It’s important, therefore, to confirm this amount before signing up for an HP plan.
Some HP plans also allow the option of paying a deposit. If you do this, it should reduce your monthly repayments. It could also affect the amount of the final admin fee due.
Why choose HP?
If you would like to own the car after a set period of time, then HP can be a good option. As it involves fixed monthly sums, it can also help you to manage your finances as you know exactly what you’ll be paying, when and how long for.
Can I use a personal loan to buy a car?
What is a personal loan?
A personal loan, unlike some other types of borrowing, is not secured on the car. This is why it is often referred to as an ‘unsecured’ loan. Where a secured or fixed term loan treats the car as an asset the finance company can claim on, this is not the case with a personal loan.
You are the car’s owner from the outset if you buy it using a personal loan. This means that you’re free, from the very start, to modify or sell the car, as it’s entirely yours to do with as you wish. Conversely, with a secured loan, you cannot sell or modify the car until the finance has been completely repaid.
A potential pitfall that applies to personal loans is their availablity - especially at a decent rate of interest. As the lender does not have the car as collateral, they will not offer as competitive a rate as they usually do for a secured loan. It can also be difficult to get a good rate unless you have a great credit score.
One drawback of personal loans is the associated lack of consumer protection. When you sign up to other kinds of car finance, you are given a certain level of protection by the Consumer Rights Act. This does not apply when you buy using a personal loan, as the vehicle itself does not form part of the agreement. With a personal loan, you have simply borrowed money from a bank or other lender, and what you buy with that sum - whether that’s a car or something else - is entirely up to you.
Why opt for a personal loan?
A personal loan gives you the freedom to modify or sell the car if you want to, as you’re its owner from the very beginning. It can be a good option if you have a good credit rating, and the lack of restrictions means it could be a good option for anyone who wants to buy an older car, such as a classic vehicle, or one with a high mileage.