21 June 2016 by Christofer Lloyd, Finance Editor

  • Dacia finance
  • Citroen finance
  • Car loan
  • PCP and Hire Purchase plans can include discounts and zero-percent APR
  • You own the car from day one if you fund it with a personal  loan
  • Hire Purchase can be easier to secure if you have a lower credit rating

One of the major factors that differentiates car finance schemes is whether they let you buy the car at the end. While Personal Contract Hire (PCH) schemes don’t give you the option to buy the car at the end of the contract – with drivers leasing the car and then handing it back – Hire Purchase is geared up so that once you’ve finished your monthly payments, the car is yours. 

In contrast, PCP gives you until the end of the contract to decide whether you want to purchase the car. If you’re sure you want to keep the car once your finance term comes to an end, though, Hire Purchase can sometimes be a more cost effective option. 

However, you always have the option of a personal loan, so how do you choose which offers better value for you?  

Lower interest and additional incentives with PCP and Hire Purchase

The best PCP and Hire Purchase schemes feature manufacturer discounts, such as deposit contributions and list price savings. However, the two often differ in terms of interest rate, with PCP proving cheaper in some cases if you plan to buy the car and Hire Purchase saving you money with other models.

For instance, while Citroen will charge you 4.9 percent APR if you go for its PCP scheme on the C4 Grand Picasso 2.0 HDi 150 Exclusive – albeit with a £1,500 deposit contribution – this drops to zero percent with its Hire Purchase option*. Even taking into account Citroen’s discount, there’s still a £1,159.92 difference in the overall cost, with PCP proving pricier here. However, both options are still cheaper than the best value loans.

Loans can cost more when a car company offers large discounts

As personal loans are sourced separately to the car, these can prove costly compared with discounted manufacturer finance deals; fund the £25,215 cost of the C4 Grand Picasso above through a loan (paying £215 upfront to drop the loan interest rate into the lower sub-£25,000 band) and you could pay as little as 3.6 percent APR*. 

Do this and you’d pay a total of £27,095.60 – £720.68 more than buying through PCP (due to the Citroen £1,500 deposit contribution) and £1,880.60 more than the Hire Purchase route*. Not all car companies offer zero-percent APR, however, so it’s worth comparing the APR rate for the model you’re interested in with the loans available for the specific value of the car.

Opt for a loan when manufacturer APR rate is high

Loans can prove much better value than manufacturer offerings, however, depending on how many incentives the car company provides. Dacia, for instance, currently charges a very high APR rate of 7.9 percent on its PCP plans. Though Dacia currently offers deposit contributions, you’d still be much better off going for a low-interest loan. 

While you’d pay a total of £8,530 for the £7,595 Dacia Sandero Ambience TCe 90 with the company’s PCP offering, you could save nearly £430 by opting for one of the best value loans currently available – offering 3.2 percent APR*.  Work out how much you can afford to borrow with our finance tool.

Funding through a loan means you own the car from day one

Opt for a loan and you own the car from the start, unlike Hire Purchase, where the car doesn’t become yours until you’ve paid off the balance. Another benefit comes in the form of not having to pay a large up-front payment, as you do with many Hire Purchase set-ups.

On the other hand, it can be easier to be accepted for a Hire Purchase scheme than a loan if your credit history isn’t great. The process of signing up for Hire Purchase can also be simpler, as you can do this in the dealership before driving off in your new car – and rates on cars over £25,000 are often lower than you could get with a personal loan.

PCP offers flexibility, while Hire Purchase can be cheaper than a loan

While loans let you borrow money for multiple purposes – and give you the opportunity to own your car from day one – choosing one to finance your car means you can miss out on a number of great-value manufacturer offers. PCP, meanwhile, lets you hand the car back at the end of the contract, if you decide you don’t want to keep it.

Unless you’re happy to haggle hard with the dealer for a discount on the list price of the car you’re buying – as you’re effectively paying in cash with a loan – you may also face a bigger bill to fund your next car, before you even take interest into account. 

If, however, the manufacturer charges a high rate of interest and doesn’t offer large incentives, you could be quids in by choosing to get a loan rather than going for one of the car company’s offerings. Tot up the total cost of both options – accounting for any set-up charges or car company discounts – and you should be able to see which option will cost you less.

Want to find out more about car finance? Click on the links below:

Car finance: what is hire purchase?

Car finance explained: what is PCP?

Car finance: which option is right for you?

Calculating car finance: how to get the sums right

How to buy a high-end car for a low-end budget with car finance

*Deals are correct at time of publication. Everyone’s financial circumstances are different and credit is not always available – Parkers cannot recommend a deal for you specifically. These deals are indicative examples of some packages available this week.