PCP vs HP vs Bank Loan.

Soldato
Joined
7 Sep 2008
Posts
5,589
Let's assume I'm looking to buy a car that's worth around £15,000

What I'm confused about is which finance route to take....

Getting a loan from the bank appears to be the cheapest option. I can get £12k (3k of my own money to make 15k) for £215 a month for 5 years and I own the car outright straight away. Overall I'm playing an extra approximately £900 on top of that over 5 years (total cost of the loan = £12,900.

Yet with PCP over a period of two/three years I'm paying just a bit more per month but at the end of the term the car doesn't belong to me and I have to pay said amount to own it. Which looks like it will cost me much more than £900 when compared to the bank loan.

HP tends to be very expensive compared to PCP, so what I'm asking here is which is the most financially economical option and why do people not often get a loan from a bank to buy a car?

It just looks cheaper overall in my findings.

Let me know what I'm missing here....
 
Permabanned
Joined
2 Apr 2007
Posts
1,038
If the pcp Apr is less than the loan then its cheaper

I might mean HP, if the pcp charges add up to more than the loan charges its more expensive just add up the costs and subtract.
 
Soldato
Joined
27 Dec 2011
Posts
5,683
so what I'm asking here is which is the most financially economical option

The one with the lowest interest cost... Which is probably taking a loan out for 12 months, but that pushes up the monthly cost, which leads onto the below:

and why do people not often get a loan from a bank to buy a car?

Because the monthly payments are higher, which comes down to personal cashflow.

There's a balance/happy medium somewhere for everyone. Only you can decide what that is, depending on your appetite for risk and financial cost.
 
Soldato
OP
Joined
7 Sep 2008
Posts
5,589
The one with the lowest interest cost... Which is probably taking a loan out for 12 months, but that pushes up the monthly cost, which leads onto the below:



Because the monthly payments are higher, which comes down to personal cashflow.

There's a balance/happy medium somewhere for everyone. Only you can decide what that is, depending on your appetite for risk and financial cost.

thanks 12 months is just not feasible as the cost is £515 per month, overall cost = £360
I will struggle with that payment.
 
Soldato
Joined
26 Feb 2009
Posts
14,814
Location
Exeter
A few things

I think you're comparing a 5 year loan to a 3 year PCP from the sounds of it? PCP is just a loan thats got a different structure to repayments - often works out very similar to 5 year loan/HP as the baloon payment is often just under half of the purchase price (2/5 years).

A loan is likely to be the cheapest, but a few things to bear in mind. First is that you are unlikely to get the advertised rate from the bank. I looked recently - earning a good salary with few other commitments and a very high credit rating, I was offered 9.9% with Zopa compared to their headline 2.9! That wasnt through a full application, just the eligibility checker. Car finance tends to be easier to get approved for and you'll get the rate advertised - with a loan you wont know until you apply what rate you'll get.. it might be higher than HP/PCP. This is the main reason people go for car finance, they're much more likely to be accepted

Secondly, less applicable for used cars which I'm guessing is what you're looking at but still worth mentioning - there are often finance offers. Deposit contributions, 0% offers etc. This can make car finance more appealing, some people even buy on finance and pay it off straight away to take advantage of the offers!

Finally, you have the right to whats called voluntary termination. This says that after half of the repayments are made you can hand the car back - regardless of its market value (obviously subject to condition and mileage). This isn't much use for PCP as it means the total amount including the balloon, so 50% is near the end of the agreement anyway, but for an HP it means you can walk away after half the period.

If you plan on keeping it and can actually get the headline rates, the bank loan is the cheapest option. Realistically its still fairly easy to change cars and upgrade with a personal loan, so long as you dont have negative equity you can just sell the car and pay off the loan with the proceeds, then go get another loan for a new car. For a used car thats done its heavy depreciation, it wont depreciate to zero by the end of the loan so you should have equity in it for most of the term - even if the loan isnt secured against the car its still worth treating it like that.
 
Man of Honour
Joined
17 Oct 2002
Posts
159,534
Bank loan is best for a used car. The reason most people don't do it is because it has a higher monthly cost over a PCP and people get suckered by the appeal of a more expensive car for the same monthly.
 
Soldato
Joined
27 Dec 2011
Posts
5,683
thanks 12 months is just not feasible as the cost is £515 per month, overall cost = £360
I will struggle with that payment.

Indeed, but you can't argue that it isn't the "cheapest" way of doing it, like for like.

All comes down to cashflow - I've always found that buying a car that's around 2-3 years old, putting down as much of your own money as you feel comfortable with, and then financing the rest works best.

Similarly I enjoy having a car that's equal or higher in market value to the total payable loan that's used against it. As mentioned before, a PCP is unlikely to ever be in this position until the third year.
 
Soldato
Joined
20 Oct 2010
Posts
4,168
I took out a loan and my own cash to buy a car outright as although the PCP was cheaper (only a few £s a month) I would've been tied to 8k a year and I'm currently doing between 25 & 30k

I guess it all comes down to personal circumstances as to what suits each person at that given time
 
Soldato
Joined
26 Feb 2009
Posts
14,814
Location
Exeter
I took out a loan and my own cash to buy a car outright as although the PCP was cheaper (only a few £s a month) I would've been tied to 8k a year and I'm currently doing between 25 & 30k

I guess it all comes down to personal circumstances as to what suits each person at that given time

PCP doesnt "tie" you to a certain mileage

If you go over the mileage you can still buy the car at the end of the agreed rate

You can also pay the excess if you hand it back

You can also specify the mileage when you apply. Higher mileage, lower baloon payment, higher monthly repayments. It doesnt impact the total amount you're borrowing, it just shifts more or less into the balloon
 
Soldato
Joined
22 Oct 2002
Posts
8,234
Location
Near Cheltenham
Let's assume I'm looking to buy a car that's worth around £15,000

What I'm confused about is which finance route to take....

Getting a loan from the bank appears to be the cheapest option. I can get £12k (3k of my own money to make 15k) for £215 a month for 5 years and I own the car outright straight away. Overall I'm playing an extra approximately £900 on top of that over 5 years (total cost of the loan = £12,900.

Yet with PCP over a period of two/three years I'm paying just a bit more per month but at the end of the term the car doesn't belong to me and I have to pay said amount to own it. Which looks like it will cost me much more than £900 when compared to the bank loan.

HP tends to be very expensive compared to PCP, so what I'm asking here is which is the most financially economical option and why do people not often get a loan from a bank to buy a car?

It just looks cheaper overall in my findings.

Let me know what I'm missing here....

Yep, welcome to the world of finance!

PCP's can make sense (or at least not be financially scandalous) depending on the term residuals and overall cost, mainly on new cars where the monthlies would not remotely be tenable to most people, so its the only way to get in to something expensive.

I've been through this but even more extreme on our last purchase. For the same deposit and 4 year term, the bank loan was only £20pm more (£960 over the term) yet, we would own the car, compared to the PCP where the balloon was £12800.

Despite haggling, the amortised difference was still £9K over 4 years, crazy!

But that is clearly a used example where
- The depreciation is 'average'
- The car was sought after and difficult to haggle on
- The dealer was greedy and had a 12.9% APR on PCPs by default

I'd only get a PCP if I just wanted to get in to something new and expensive in a YOLO moment., e.g. I was initially looking at the £549 deposit + 36 * £549 for a new BMW X3 M40i, that was due to crazy £10k manufacturer/dealer contribution and clearly a special promotion, but to think of a bank loan on a £50K vehicle isn't remotely an option for me.
 
Soldato
Joined
7 Nov 2009
Posts
19,798
Location
Glasgow
Is it a new car? You will often get incentives to take out the PCP, could be a deposit contribution (a discount) or free servicing/extended warranty. In which case it may make sense to take out the PCP to get the perks but then withdraw from it by paying off the balance with the loan.

Often, you wouldn't get these perks without taking out manufacture financing.
 
Soldato
Joined
10 Sep 2003
Posts
4,942
Location
Midlands
I've had PCP and Loans in the past, usually PCP when it's a new 0% offer with deposit contribution. Free borrowing, can't get cheaper than that :)

Just got a loan with Tesco for my latest used car and got their headline rate (2.9). I didn't realise they could have offered me a higher rate until I read this so I must have a pretty good credit rating.
 
Soldato
Joined
26 Feb 2009
Posts
14,814
Location
Exeter
Is it a new car? You will often get incentives to take out the PCP, could be a deposit contribution (a discount) or free servicing/extended warranty. In which case it may make sense to take out the PCP to get the perks but then withdraw from it by paying off the balance with the loan.

Often, you wouldn't get these perks without taking out manufacture financing.

Could be tricky as you'd have to be borrowing double the amount for a short period, depending on existing borrowing you may not get approved for the loan to pay it off

I've had PCP and Loans in the past, usually PCP when it's a new 0% offer with deposit contribution. Free borrowing, can't get cheaper than that :)

Just got a loan with Tesco for my latest used car and got their headline rate (2.9). I didn't realise they could have offered me a higher rate until I read this so I must have a pretty good credit rating.

Weirdly it doesnt seem to be just about credit rating. I was just reading a comment thread on a Facebook ad for Sainsbury's bank loan (god bless targeted advertising...) and a load of people saying they got offered a much higher rate despite an excellent credit score. Seems to be you're more likely to get it with the more you borrow - most of the commenters saying they got 2.9 were borrowing 20-25k and those being offered a higher rate were borrowing 8kish (the 2.9% is advertised as from 7500 up). Need to be careful as the offer doesnt come until they send you paperwork to sign, by which point you've already done the credit search. You can turn it down at that point but too many searches can be bad. I dont know how accurate they are but the credit score websites search loans and give you a likelihood of approval based on your credit file, that seems like a sensible approach

On the PCP, its not free borrowing though really. If you get a quote for the car from a broker, you'll see a finance price and a cash price. The finance price is normally higher when they have 0% deals - normally by about the amount of the contribution and interest! You need to weigh up all options equally
 
Soldato
Joined
20 Oct 2010
Posts
4,168
PCP doesnt "tie" you to a certain mileage

If you go over the mileage you can still buy the car at the end of the agreed rate

You can also pay the excess if you hand it back

You can also specify the mileage when you apply. Higher mileage, lower baloon payment, higher monthly repayments. It doesnt impact the total amount you're borrowing, it just shifts more or less into the balloon

Of that I am aware
 
Soldato
Joined
15 Aug 2010
Posts
8,745
Location
N. Ireland
most of the commenters saying they got 2.9 were borrowing 20-25k and those being offered a higher rate were borrowing 8kish (the 2.9% is advertised as from 7500 up).
Can you not just borrow the 20k to get the better rates, use what you need then give back the remaining value?
 
Soldato
Joined
22 Nov 2006
Posts
23,304
With PCP/finance you don't own the car, it's basically renting until you pay 100% of it off. With a bank loan you will own it and don't have any restrictions on what you do with it. That's the important difference.

If you just want an car to go to work then PCP is fine. If you want to modify it or do loads of miles then no.
 
Last edited:
Soldato
Joined
22 Oct 2002
Posts
8,234
Location
Near Cheltenham
I've had PCP and Loans in the past, usually PCP when it's a new 0% offer with deposit contribution. Free borrowing, can't get cheaper than that :)

Just got a loan with Tesco for my latest used car and got their headline rate (2.9). I didn't realise they could have offered me a higher rate until I read this so I must have a pretty good credit rating.

There are some cracking deals if you look hard enough, but this last purchase (family SUV) was eye-opening, in most cases using carWOW we had much larger discounts (even at 3-4% APR) then we got offered by the dealer and the amortised amounts looked worse for the 0% deals.
For example, Skoda Kodiaq L&K, 39K list with 2.5K dealer discount and 2K deposit @ 0% was £458 over 36 months. (18K Residual)
Via carWOW, £7K discount (including dealer contribution), 2K deposit, 4% APR, everything else identical = £414 over 36 months (~1.5K saved), and actually haggled that down to 2.5% APR and £8K dealer discount/contribution @ £355 a month (£3708 over the term)

I hate buying cars, you know if you put a stupid amount of legwork to find the right deal, you can save stupid amounts of money.

Of course, don't do what I did last time I put the legwork in, notionallly worked out I'd saved £9K over the term, so spent some of the 'saved' money on a new RTX2080MQ gaming laptop for VR duty!
Man Maths at its finest!
 
Last edited:
Back
Top Bottom