What are the alternatives to PCP car finance?

Deciding on the best way to finance a car can often feel like trying to find your way through a maze without a map. If you’re looking for independent guidance, a car dealer is no help as they will simply point you in the direction of a personal contract purchase (PCP) because that’s what suits them. But there are plenty of alternatives to PCP car finance, depending on whether you’re looking for a new or used car, and whether you’re looking for a petrol/diesel car or an EV.

With options ranging from hire purchase (HP) agreements to personal loans, leasing, salary sacrifice, subscriptions and even paying with cash, there are more funding choices available to car buyers than ever before. This guide aims to shed light on these various financing methods, helping you to make a decision that aligns with your financial situation and car ownership goals.

To help identify which type of finance is likely to work best for your needs, it helps to have an understanding of the following, as different types of finance are better suited to different financial circumstances:

• How much money do you want to spend up front and then each month?
• Do you want a new car or a used car?
• Do you want an EV or a petrol/diesel/hybrid car?
• How long do you want to keep the car?
• Do you want to be locked into a fixed date to change the car or would you prefer flexibility?
• Does your workplace offer any car finance schemes like salary sacrifice?

A quick refresher: The personal contract purchase (PCP) explained

Hire Purchase (HP)

Hire Purchase (HP) is the original car finance product, and still a viable option for plenty of car buyers. You won’t come across them on a new car too often, as the car companies and dealers are all geared towards PCP or PCH (leasing), but there’s nothing to stop you choosing to use an HP to fund a new car if you want to.

Under an HP agreement, you pay a deposit upfront followed by monthly payments. These payments cover the entire cost of the car plus interest. It’s a form of secured finance, so the finance company essentially owns the car until you’ve paid off the last penny. You sign a contract to buy the car from the dealer, the bank pays the dealer for the car, and you then pay off the bank over time. It works in the same way as a mortgage on your house, where you might consider yourself a ‘homeowner’ but it’s actually the bank in charge.

There’s no final balloon payment like you get on a PCP agreement. That means that the monthly price is higher on an HP, as you’re paying off more of the loan each month. The flip side is that you’re better positioned if your financial situation goes south, as you’re paying off more of your debt each month. So if you need to sell the car because you can’t afford the payments, your car’s selling price is more likely to cover your debt to the finance company. With a PCP, that’s not usually the case.

You don’t have a guaranteed future value (GFV) like you do with a PCP, so if the car’s value drops faster than expected, you can’t just give it back at the end of the agreement. But that also means that you don’t have to worry about mileage limits, vehicle condition or servicing like you do with a PCP.

With HP or PCP car finance agreements, customers are also protected by a consumer right called voluntary termination (VT). This has more value for an HP than it does for a PCP. For more information, we have a comprehensive guide to voluntary termination.

In terms of monthly payments, a five-year HP will usually result in similar monthly payments to a three-year PCP – all other things being equal. So a five-year HP could be a viable alternative to a three- or four-year PCP, depending on your budget and future plans.

HP finance tends to be best for used car buyers, particularly if you’re looking at a cheaper used car (say, less than £10,000). It’s also a good choice if you want to keep the car beyond the finance term, rather than being forced to change it.

HP also tends to be useful for customers with relatively poor credit records – because the finance is secured against the car, lenders tend to be more comfortable lending to sub-prime customers.

Learn more about HP car finance:

Personal loan

A personal loan usually comes from your local bank or building society. They generally offer a lower interest rate than an HP or PCP – although it can vary considerably – and the loan is unsecured. That means that the bank lends you the money (instead of paying the car dealer directly) and you use it to buy whatever car you like.

If you’re looking at buying a car privately or at an auction, a personal loan may be your only real option as most lenders won’t offer HP or PCP car finance on a car from a private seller or auction house.

The interest rate is fixed for the duration of the loan, although you may not be offered anything like the advertised ‘Representative APR’. This is particularly the case if you have a poor credit history or you’re only borrowing a relatively small amount of money.

Terms can stretch from one to seven years, so there’s flexibility for you to find the right term to match your monthly budget. Bear in mind, however, that you don’t really want the loan to last longer than you plan to keep the car, so you don’t end up continuing to pay off a car that you no longer own.

There’s no question about who owns the car or what you can do with it – it’s yours from day one. That means you can do whatever you like to the car as you don’t have to worry about handing it back like you would with a PCP or PCH agreement. It also means that the bank can’t repossess the car if you fail to maintain your monthly payments – although they can punish you heavily and even push you into bankruptcy.

Like an HP, your payments will be higher than a PCP for the same borrowing amount over the same term. But because the finance is not linked to the car, you have more flexibility and control over what you do with the car at any time. Compared to an HP, your payments could well be a lot less if you can get a favourable rate from a bank. But if you’re a sub-prime customer, you may struggle to get a personal loan at a competitive interest rate.

Unlike HP or PCP car finance agreements, you’re not covered by voluntary termination protections with a personal loan. That means less protection if your finances go bad.

For a similar interest rate, a personal loan should give similar payments to an HP agreement. That means a five-year personal loan could be a viable alternative to a three- or four-year PCP car finance agreement.

A personal loan tends to be best for used car buyers, especially if you are buying from a private seller. There’s often a maximum limit on how much you can borrow, so it tends to work best for cheaper used cars (up to about £15,000). It’s also a good choice if you want to keep the car beyond the finance term, rather than being forced to change it.

If you have a good credit record, personal loans can be quite a cheap way to borrow money. However, if you a poor credit history then you may struggle to get a personal loan at a competitive rate.

Leasing

Car leasing, more specifically known as personal contract hire (PCH), is essentially a long-term rental. You pay an upfront fee and then a monthly fee to use the car, but you will never own it – unlike a PCP or HP, where your monthly payments are steadily working towards eventual ownership of the car.

Most leasing involves brand-new cars, rather than used cars. There is a small but growing market for used car leasing, but it’s still very limited. Usually it involves customers taking up leases from other customers who have defaulted on their agreement or terminated their lease for some reason.

The ‘initial rental’ is broadly similar to the upfront deposit on a PCP. The higher your initial rental, the lower your monthly rental. Most leases tend to run for two to four years. At the end, there’s no option to buy the car – it just goes back to the leasing company.

Leasing tends to be cheaper than PCP finance on many cars, usually thanks to the buying power of leasing companies. Because they usually pay much less for a new car than your or I do in a showroom (because they buy thousands of cars a year), leasing companies tend to get massive discounts. That means they can afford to set their payments lower. However, the best deals are usually on cars that are in stock, rather than on a custom order for a new car.

As with a PCP, you are obliged to keep within your mileage allowance, ensure there is no damage beyond normal wear and tear, and have the car serviced on time, every time, usually by an official dealer rather than your local garage. Failure to stick to these conditions will result in huge penalties.

If you want or need to cancel your lease mid-term, there are large penalty charges – usually higher than you’d get with a PCP. You also don’t benefit from voluntary termination rights with a lease like you do with a PCP or HP.

On the downside, because you never own the car, your payments do not contribute towards ownership equity in the vehicle. Additionally, lessees must consider mileage caps; exceeding these limits can result in hefty penalties at the end of the lease term. Also, any modifications or significant changes to the vehicle are typically restricted.

PCP car finance can be more attractive than PCH leasing if there’s a possibility you might want to own the vehicle at the end of the agreement. It provides more flexibility by offering the choice to either return the vehicle, trade it in towards another car, or purchase it outright with the final balloon payment.

Leasing tends to work best for new-car customers, as the payments are often cheaper than on a PCP. It can also be good if you like to change your car fairly frequently, as terms don’t usually go beyond four years. There are also usually plenty of deals on offer from hundreds of leasing brokers.

However, leasing tends to be very inflexible, so if your circumstances change the penalties for early termination can be very large.

Learn more about car leasing:

Salary sacrifice

Salary sacrifice (known as sal-sac) is a form of leasing that used to be quite popular, then it largely died out when tax rules changed, as there was no great benefit over other forms of car finance like leasing. However, this has changed for electric vehicles, so sal-sac is making quite a comeback.

Electric vehicles attract less Benefit in Kind (BiK) tax, which means the amount of money deducted from your pre-tax salary each month is much less than if you bought the same car from a dealer using a PCP using your after-tax salary. Industry sources have suggested to The Car Expert that as many as half of all new EV buyers are using salary sacrifice, compared to about 90% who use PCP car finance on a petrol/diesel/hybrid car.

If you’ve never taken a salary sacrifice package before, the jargon can be quite confusing because you’re not talking about a simple monthly payment or rental. The amount you pay will also depend on your salary, as that determines how much tax you pay – the higher your earnings, the cheaper a car can be.

To be able to lease a car on sal-sac, your employer has to be enrolled in a sal-sac programme. It also tends to rule out self-employed people, or those who don’t have a consistent PAYE salary, but you’ll need to speak to a sal-sac provider to determine your eligibility.

There’s no real cost benefit for choosing sal-sac on a petrol or diesel car, and most sal-sac deals are only for new cars. There’s a small but growing market for used car sal-sac, but it’s currently very limited.

Salary sacrifice is a great choice if you’re looking at a new electric car, and assuming you’re eligible for a sal-sac lease. You could potentially save hundreds of pounds a month compared to a PCP, depending on the car.

Learn more about salary sacrifice:

Car subscriptions

Car subscriptions are a new form of financing, and are essentially short-term rolling monthly leases. The idea follows popular digital and consumer models where you have a rolling monthly contract rather than a fixed, long-term agreement.

A car subscription usually has little to no upfront cost, but the monthly payments are higher. You can keep the car as long as you like, but subscription is generally aimed at people who want a car from 1-12 months, rather than 3-4 years. If you’re looking to keep the car longer than a year, a regular car lease is likely to be cheaper overall.

Depending on your provider, you can change cars as often as every month – although there are usually fees for collecting and delivering cars, so that could get quite expensive. If you like that idea, or if you only need a car for a few months (maybe for seasonal work, or if you’re only in the UK for a short while), then a car subscription would probably work out cheaper than a short-term car rental. And certainly cheaper than terminating a long-term lease within your first year.

A popular attraction of subscriptions has been the ability for customers to try out an electric car for a few months to see if an EV suits their lifestyle. If it turns out that you don’t like it, you can give it back with very little notice and no termination charges. If you took out a four-year lease or PCP on an EV and then decided you didn’t like it, it would cost you a fortune to get out of it.

Insurance can usually be included (at extra cost), which also helps for customers who are not UK residents. The cars are usually new or near-new, and you may get a car that has previously been used by another subscriber (a bit like a rental car).

Car subscriptions are great if you only need a car or van for a few months, or if you like the idea of changing your car regularly. They’re also a great way to try a different car, like an EV, without having to make a long-term commitment.

If you want to stick with the same car for longer than a year, a regular car lease is probably cheaper.

Learn more about car subscriptions:

Cash purchase

If you’re not keen on borrowing money or committing yourself to ongoing monthly payments, you may prefer to pay for a car in cash. Of course, that does require you to have sufficient savings to splash thousands of pounds on a car, which rules out most people.

In days gone by, having cash (or funds provided from a personal loan) gave you a great negotiating position to haggle with a car dealer. Today, however, that’s less likely. Main dealers, in particular, are heavily incentivised to sell you car finance, and the best new car deals are almost always attached to finance packages. There are also restrictions about paying for a car in physical cash – usually, you’ll have to transfer the funds electronically as dealers are unable to accept large quantities of cash thanks to money-laundering laws.

However, a cash purchases can still hold some advantages worth considering. You own the car immediately, unlike a PCP, and you don’t have to pay any interest. This can be significant, as interest rates are usually more than 10% APR on a used car, adding thousands of pounds to the overall cost of the vehicle.

Some dealers, particularly smaller independent garages, may still prefer the immediacy of having funds in the bank rather than finance. That means they may be prepared to offer you a better price if you can pay up immediately.

If you do have thousands of pounds to spare that you’re thinking about using to buy a car, it’s probably worth speaking to a financial advisor first. They may suggest a better use for that money to earn you more from other sources, which could outweigh the interest you’d pay by financing the car.

Summary of PCP car finance alternatives

Although PCPs still make up the majority of new car financing for private customers (up to 80%), this is starting to come down as alternatives to PCP car finance become better known and understood.

Today, there are more choices than ever for funding your next car. This is great news for consumers, although it’s important to carefully compare your options to work out what’s best for you and your finances – today and for every month that you’re planning to keep the car.

As a general rule, the cheapest options tend to be the least flexible, so you need to be confident that your financial and/or employment situation will be stable for the next 3-4 years. If you like the idea of ultimate flexibility, be prepared to pay more for that privilege. And there are options in between that offer varying degrees of affordability and flexibility.

Even if you do decide to stick with a PCP, there are plenty of online brokers and lenders that may be able to offer you a better deal than the car dealer – especially if you’re buying a used car.

Explore your options, get plenty of different quotes and understand how different finance products work. The more effort you put in, the more likely you are to end up with the best financial choice for your needs.

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