We’re all looking for ways to save money and car finance is no exception. Spreading the cost into manageable monthly payments means you don’t have to pay out one large lump sum. But that doesn’t mean you can’t find even more savings by choosing the right product.
So which is the cheapest type of car loan? Let’s take a look.
A car loan works like any other loan, where you borrow a set amount of money to fund the purchase of a car. Like in other car finance products, you are charged interest on the amount you borrow, but there are no additional fees like balloon payments or ‘option to purchase fee’ (see hire purchase).
However, car loans are treated as unsecured loans. By that, we mean that the car you buy with the money is not owned by the lender, so there is no security on the amount you borrow, as they are lending you the money, rather than loaning you the car and having you make payments to purchase the car from them. This can mean it’s not as easy to be approved as other types of finance product.
A Personal Contract Purchase package works much like a lease purchase or car leasing deal. You pay off the depreciation of the car’s value from the start of the package to the end, meaning you aren’t paying for the total cost of the car.
Another benefit is that, in a Personal Contract Purchase deal, you have three options at the end of the agreement. You can pay a one-off balloon payment to buy the car, part exchange the vehicle on a new finance agreement, or return the car to the dealer at no charge. This flexibility means you end up with better value for money, even if the cost is the same.
A hire purchase deal spreads the entire cost of the car and the interest charged between the manageable monthly payments. This is ideal if you have a set budget to work with. Some lenders will charge an ‘option to purchase fee’ at the end of the agreement, but this is much smaller than a balloon payment.
Because the debt is secured against the car you are financing, it’s easier to get approved. This can lead to more favourable terms available in terms of the amount of interest you are charged.
Lease Purchase works like hire purchase where you own the car at the end of the agreement. Lease purchase is spread into three payments: an initial deposit, the repayments, and then a final one-off balloon payment to complete the purchase.
There is a lot of flexibility with the amount you reserve for the final one-off payment, meaning the monthly payments in the middle of the agreement can be a lot lower than hire purchase and even PCP payments. When you get to the end, you sometimes have the option to refinance the car to make the balloon payment or making additional monthly payments.
All four options have their different perks and bonuses. A car loan can be one of the cheapest methods to finance the purchase of a car, but the terms set by the finance provider can be more restrictive.
Personal contract purchase costs the least out of all the deals, but you don’t own the car at the end of the agreement unless you pay the balloon payment, meaning you don’t automatically any equity for the money spent on the deal. But the flexibility at the end can be useful if you know your financial circumstances are going to change.
Hire purchase and lease purchase can both have the term length adjusted to reduce the amount spent on monthly repayments, but you have to pay off the whole cost of the car.
Each package is right for different people. What you need to do is look at the finances you have now, the finances you think you’ll have in the future, and your monthly budget. By examining these closely and working with your customer advisor, you can find the most affordable package for you.