Borrowing money to buy a car is growing in popularity despite mis-selling worries, but motorists should beware taking out a deal they cannot afford and getting into debt.
Normally, buying a car means paying cash upfront, either from savings or a loan, or entering into a hire purchase or contract hire deal that means you pay off the full value of the vehicle, plus interest. Hire purchase deals eventually mean you own the car outright.
But a new breed of financing offers an alternative. PCP, which stands for “‘personal contract purchase”’ or “‘personal contract plan”’, is a loan based on the car’s projected value at the end of the deal, rather than at the beginning.
This means the monthly payments (which include interest) are lower, typically allowing you to drive a pricier car than you’d otherwise be able to afford.
The borrower puts down a deposit, usually 10 per cent, and agrees with the dealer how much they expect the car to be worth at the end of the loan period, which usually lasts two to three years.
The borrower can pay the remaining amount owed (the balloon payment) and own the car outright, or hand the car back and get a new one. Around 80pc of all new cars are bought on finance, according to What Car?