Bank Loan or PCP: Which is Right for You?

What is PCP car finance?

PCP car finance is one of the most popular types of car finance agreement.

If you choose a PCP car finance agreement, you’ll be splitting the cost of your vehicle into three chunks:

• Monthly repayments plus interest
• A deposit
• An optional final payment, along with a small option to buy fee (also known as a balloon payment)

With PCP, you benefit from lower monthly repayments and flexible deposit options compared to other car finance agreements. You won’t own the car unless you choose to pay the final lump sum, after which the vehicle belongs to you. You’ll also face mileage restrictions and can face penalties if you breach these, or if you cause undue wear and tear to the vehicle.

PCP contracts have a voluntary termination clause, which allows you to exit the agreement early, provided you’ve paid off at least half of the loan. Bank loans must be paid off in full.

A PCP term is typically anywhere from 24 to 36 months. The longer the term of your PCP finance agreement, the lower your optional balloon payment will typically be.

Remember that you will pay interest on the monthly repayments for a PCP agreement.

What is a bank loan?

With a bank loan, you’re borrowing the full value of the vehicle and buying your car outright. You then pay this amount off with a series of monthly instalments, and you don’t have to pay a deposit (but you may be able to, depending on the bank). These monthly instalments are typically higher with a bank loan than they are in a PCP agreement.

With a bank loan, you can choose to only borrow part of the car’s overall value – you can use your savings to make up the outstanding amount.

Unlike with PCP, you’ll own the car outright from the get-go, so you can sell or change it whenever suits you. You also won’t face restrictions around mileage or other usage and can modify the car during the deal if necessary.

Bank loans typically aren’t secured against the car, so if you fall behind on repayments, it can’t be taken away. That said, bank loan amounts may be limited in size to minimise risk to the lender, depending on their policy.

Individuals with poor credit ratings are unlikely to secure a bank loan. Equally, you’ll have to apply individually to different banks for a bank loan. Each application will require a credit check, and these are often hard credit checks in the first instance, meaning they’ll leave a mark on your overall score. With car finance, the initial credit check is soft. Please note that should you progress, some lenders may perform a hard search on your credit file.

A typical bank loan length is anywhere from 12 to 60 months.

Bank loan or PCP: pros and cons

Bank loan pros

• Can be the simplest way of financing a car, as you can use the loan to buy from any private seller or business.
• The car belongs to you immediately, so you can sell it on or modify the vehicle if desired.
• No usage restrictions.

Bank loan cons

• Higher monthly repayments compared to PCP.
• Because you own the vehicle, you’ll bear the financial front if it experiences significant depreciation.
• Bank loans are often limited in size, and individuals may not get the advertised rates.

PCP pros

• Lower monthly repayments compared to a bank loan.
• You don’t have to keep the car once the agreement ends.
• Great for people who like to regularly switch up their vehicle for a newer, higher-spec model.
• Guaranteed future value (GFV) of car, so you could benefit from positive equity at the end of the agreement.

PCP cons

• You are not the car’s owner unless you make the final optional balloon payment.
• Usage and modification restrictions.
• The car can be repossessed if you fail to keep up with monthly repayments.

PCP vs bank loan – which is right for you?

PCP car finance is ideal for those looking for lower monthly repayments and who like to change their car often. With PCP, you also benefit from flexible options once the agreement ends and can choose to hand the vehicle back if it no longer serves you. This is providing the vehicle is in good working condition and within the annual contracted mileage.

Bank loans are great for individuals who want to own the car outright from the get-go, and don’t want to face any usage restrictions.

Discover your car finance needs today

If you’ve still got questions about PCP vs a bank loan, check out our other blogs on available finance options or try out our online car finance calculator to begin your car buying journey today.