If you’ve been considering car finance as a way to purchase your new car, then you might be wondering which option is the cheapest. We all want to save money where we can, so any savings we can make are welcomed. But if you’ve never taken out a car loan before, you might be unsure of which option is best.

So which is the cheapest type of car loan? We take a look at three of the most popular products and reveal where the savings can be made.

Personal contract purchase

Cheapest for those with good to excellent credit ratings

One of the most popular products on the car finance market, personal contract purchase (PCP) is the cheapest option for those with excellent credit ratings. That’s because the amount you pay over the length of the agreement is based on the depreciation in the car’s value. You don’t automatically own the vehicle at the end of the agreement, instead you have three options: return the car to the dealer, pay a one-off balloon payment to own the vehicle, or part-exchange the car on a new PCP finance deal.

What makes this option cheaper for those with a good to excellent credit rating is because the amount of interest you will be charged will be lower because of the health of your credit file. PCP deals tend to only be offered to those with good or better credit ratings, so if you don’t have a spotless credit history, then this might not be available to you.

Hire purchase

Cheapest for those who want to own the car at the end of the loan

In a hire purchase car loan, you own the vehicle at the end of the finance period. That means the entire cost of the vehicle and the interest payments are divided across the term of the agreement.

If you know you definitely want to own the vehicle at the end of the agreement, then this could be the cheapest option. Other types of car loan can vary in the amount you pay once the finance agreement has ended. Being able to budget out the entire cost could also help you with your financial planning.

Lease purchase

Cheapest for those who want cheaper monthly payments and own the car

Lease purchase works like PCP in many ways, except that you have to pay the 'balloon payment' at the end of the agreement. The monthly repayments are still calculated based on the car's depreciation in value over the term of the finance package, so lower than if you were to divide the cost of the car across the entire agreement, like in a hire purchase deal.

This is a good option for those who may see an improvement to their financial situation in future, but don't want to wait to take advantage of a newer car in the meantime.

What about personal loans?

A personal loan can be an option to help you purchase the car, but there is a risk where the amount you borrow is not secured against the car you finance. So if the vehicle loses value and you find yourself unable to make the repayments, you could end up having to lose the car and additional monies. It all depends on how confident you are that you can meet the repayments.


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