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Knowing which type of loan to choose can prove tricky as both types of loan do two quite similar jobs, but take you along different routes to get there.
Hire-purchase – usually involves paying a deposit up front which can vary but is usually around 10 per cent of the car’s price. You then repay the remaining money you’ve borrowed in equal monthly instalments over a period of one to five years. Once you’ve paid the final instalment, you will own the car outright.
Personal contract purchase – is a bit more complicated. It starts off the same as HP in that you usually pay a deposit of around 10 per cent of the car’s value. The period for repayments in then set at anything between two and four years, with a three year period being the most common. A Guaranteed Future Value (GFV) is then set for the car which is fixed and will be the car’s expected value when the loan agreement ends. Once this has been determined, you make monthly instalments which will generally be lower than you’d have paid with HP. At the end of the agreement, providing you have paid what was promised, you will be left with three choices:
Considering the points above, it’s now time to consider which deal is better. The answer is that it really depends on you. If you are the type of person who likes to change their car every 3 years and trade it in for a new one then PCP will make more sense because of its lower monthly payments, but if you intend to buy a new car to keep for several years or more, HP might work out to be the cheaper option.
A key tip would be to make sure you compare quotes between the different types of loan before you sign up for either – look at the interest you’ll pay, expressed as the APR, or annual percentage rate as well as the total cost of the loans. Always remember to shop around before you buy and if the make you want doesn’t offer the best deal, ask them to match a rival’s loan offer.