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Car Loans. More than one way to finance a purchase. Part 2

Summary

Many people choose to take out some kind of finance when buying a new car, this discusses the variety of finance options available.

Author: Anna Richardson

Personal Contract Purchase, often abbreviated to PCP,

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is another option and has become a lot more popular recently. With PCP you stipulate at the beginning of the agreement how many miles you expect to put on your car each year, and pay a deposit. You pay monthly and that covers ( secured loans ) the capital and interest, leaving a portion of the payment called the ‘deferred balance' to pay at the end the contract. The advantage to PCP is its flexibility, because there are a wide array of options for the deposit and the length of the loan term. Interest rates are higher than the personal loan though, averaging at around 12.8%.

When the PCP contract ends you'll have three choices:

  • Pay the deferred amount and the car is yours to keep.
  • Trade in the car, which will ideally cover the deferred sum and leave some left over to put towards ( travel insurance ) your next purchase.
  • Give the car back with no penalties – you do this by not paying the deferred payment.

Option three will depend on the condition of the car and how well you managed to adhere to the mileage agreement. Exceeding the agreed mileage results ( personal loans ) in a per mile charge, which will have been stipulated in the initial PCP agreement. If you have exceeded your mileage by a big margin then it would make the most sense to pay the deferred payment rather than pay the excess mileage charge.

Although the mileage stipulation can be a disadvantage, there's a big advantage to PCP in that you are ( medical insurance ) guaranteed to be able to sell the car back at the initially agreed price, so you are protected from your car suffering from an excessive depreciation in value.

Car dealers earn commission through selling PCP contracts and will often encourage you to take the deal by ( home insurance quotes ) throwing a few incentives your way. That could include a large discount on the purchase price or discounted insurance, but don't be fooled – you still need to make sure that the ‘freebies' still make it all worthwhile compared to a personal loan.