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Unless you are a cash buyer, when buying a used car the chances are you are likely to consider opting for a personal contract plan (PCP), hire purchase (HP), or a loan writes Geraldine Herbert.

Personal Loan

The simplest way you can finance the purchase of a used car is by getting a personal loan either from your bank or credit union. You can typically take out this type of loan with repayment terms ranging from three to five years and you can borrow the amount you want to pay for the car or make up any shortfall with savings or your car trade-in value. The best way to compare loans is on APR, the annual percentage rate, as essentially this is the real cost of borrowing money because it includes interest and charges. The lower the APR, the better the finance deal.

Pros: The main advantage of a bank loan is that you own the car and therefore you can, if necessary, sell your car to repay the loan should you fall behind on your repayments. A credit union loan affords further flexibility as there are no hidden fees, admin charges, transaction charges, set-up costs or balloon payments, plus you can pay off your loan early, make additional lump sum repayments or increase your regular repayments, without a penalty. Some lenders may charge extra for paying back faster. Another advantage is that you essentially are a cash buyer so this should give you some scope to negotiate a higher discount.

Cons: As with all financial agreements you need to ensure that you only borrow as much as you can afford to repay.

Hire Purchases (HP)

Hire purchase is the simplest form of finance outside of a personal loan. With HP, you pay a deposit upfront, often 10%, and then pay the rest off in monthly instalments over an agreed period. When you have made the last payment you own the car. It is worth remembering that with any HP contract you do not own the asset until the final payment is made.

Pros:  The main advantage of Hire Purchase is that you can spread the cost to suit your budget plus you own the car at the end of the contract.

Cons:  You need to be careful about the cost of borrowing and that you are not overstretching yourself, a year down the line and €7,000 later, if you can’t keep up your payments you stand to lose both the car and all the money you have spent on it.

Personal Contract Plan (PCP)

PCPs are a form of car finance based on a hire purchase (HP) agreement. However, unlike HP or a bank loan, the repayments are typically lower, as you are paying off the depreciation of the car, and not its entire value. At the end of the agreement, you have the choice of whether to make that final payment to own the car or not. The deposit is typically between 10% and 30% of the value of the car, depending on the finance provider. Your deposit can be paid in cash or if you already own a car, you can trade this in for part or all of the deposit, depending on its value.

PCP agreements on used cars are generally offered for 24 to 36 months but some may be longer. A guaranteed minimum future value (GMFV) represents what the car will be worth once the PCP ends. Additionally, the deposit you choose to put down is taken away from the total cost of the car, and you pay monthly payments (plus interest) on the remaining balance for the term of the contract.

Pros:  If you compare financing the same car on a PCP to another loan, the big difference is that you are paying off a much smaller amount of money. Also, if your car is worth more than the GMFV, you will have built up some equity towards your next deposit.

Cons:  Generally, if you are intending to own the car at the end of the contract then PCP is not the ideal form of finance. You will need to pay a large final balloon payment (the GMFV) at the end of the contract period. It is your responsibility to service the car regularly and to stay within the agreed annual mileage.

 

About the Author

Contributing Editor and Motoring Columnist for the Sunday Independent and editor of wheelsforwomen.ie. Geraldine Herbert is also a regular contributor to Good Housekeeping (UK) and to RTÉ, Newstalk, TodayFM and BBC Radio. You can follow Geraldine on Twitter at @GerHerbert1.

 

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