Trying to secure a car loan with bad credit can feel like a challenge. Traditional lenders may feel that a poor credit score makes you a high-risk borrower. While it can be tricky to get approved for financing, it can also be hard to know which financing option is best for you.
The two primary financing options are Hire Purchase (HP) and Personal Contract Purchase (PCP). Both are available if your credit is less than perfect, but choosing between these options can still be hard.
This post breaks down the two options, HP and PCP, to help you understand which option is most suitable for your car loan requirements.
What Is Hire Purchase?
HP financing simply means that you pay for your car in fixed monthly instalments, with an initial deposit at the beginning of the term. The set period of repayment tends to vary between 1 and 5 years. As with any loan, the longer the repayment term, the more interest you will pay.
With Hire Purchase, once you have made the final loan payment, you will own your car outright.
Why Is HP Good For Bad Credit?
It can be easier to get approval for HP financing, as opposed to PCP. This is because the car is a form of collateral against the loan. If you fail to make your monthly payments, the loan provider may choose to repossess the car.
The nature of fixed payments make it easy to know how much you can expect to pay over the loan term. You will know how much money to set aside each month, and how long it will take to pay off the loan. This makes it easy to budget appropriately for your car financing.
At the end of your HP contract, you will own your car. With no further financial obligations, this is an accessible method of building towards car ownership.
This is an accessible method if you would struggle to pay for a car upfront, but still want to work towards outright ownership.
What To Consider Before Getting An HP Loan
If you have bad credit, any car loan, including HP, will have higher interest rates. This can mean the overall cost of the loan is more expensive.
Hire Purchase is also a longer commitment than purchasing a car outright. Payments typically take several years to complete, and you remain in the contract until the loan is paid off.
If you fail to meet your regular payment amount, a car lender can repossess your vehicle. This means it is important to choose an HP loan that is within your means, and that you can suitably budget each month for your payment.
What Is Personal Contract Purchase?
Personal contract payments offer more flexible options for borrowers. Alongside the deposit and monthly payments, you have several choices at the end of the loan term.
When you have finished making payments, you can choose from three options. You can return the car, pay a lump sum for outright ownership, or trade it in for another vehicle and start a new contract.
Why Is PCP Good For Bad Credit?
Choosing PCP means you arenʼt guaranteed outright ownership at the end of your loan. Because of this, monthly payments are typically lower. You are not paying off the total value of the car, as you would with an HP loan.
The flexibility of a PCP loan provides options to suit different needs. You canʼt necessarily predict what your financial situation will be in several years, so it can be nice to know you have choices when the loan ends.
Many borrowers worry that getting a car loan with bad credit will limit them to driving an older, or less popular model of car. PCP loans might mean you can drive a newer car with more modern technology, due to the flexibility of the loanʼs end. This can be particularly useful if you need a certain type of car to suit your needs or lifestyle, but would struggle to pay for it outright.
What To Consider Before Getting A PCP Loan
The flexibility of a PCP loan means that many lenders will have stricter credit checks. If you currently have bad credit, it is worth researching the types of loan that may be available to you. If you are set on a PCP loan, you may need to take some time to build your credit through other means before diving in.
Some PCP contracts have stipulations that HP loans do not. These tend to include mileage limits, which can result in extra charges if exceeded. Drivers will likely face extra fees for any damage done to the car during the loan period.
With PCP payments, it can be more expensive to own the car outright at the end of the term. Because the loan payments are typically cheaper, you are not paying off the full cost of the car. If you wish to own the car, you will need to make a ‘balloon paymentʼ, which is a lump sum of the full cost of the car. HP loans can be a more practical choice if your goal is to work towards outright ownership within a few years.
Which Loan Is The Best Option For Bad Credit?
Choosing the right type of loan is a personal choice. It depends on what you need from a car, as well as your longer term aspirations.
HP loans can be beneficial if:
- You want to own a car outright at the end of your loan agreement.
- You prefer the straightforward process of monthly payments with less stipulations.
- You are confident that you can budget for the monthly payments.
PCP loans may be suitable if:
- You are looking for a lower initial deposit and monthly payments.
- You are interested in flexibility at the end of your loan, including the possibility of trading your car for a newer model.
- You are comfortable knowing you might not own the car at the end of the loan.
- You are confident that you can meet any loan terms concerning mileage restrictions and damage costs.
For bad credit borrowers, both HP and PCP loans offer promising possibilities. Ultimately, the most important factors when deciding which type of loan to pursue are your comfortability with the terms, and your confidence that you can pay off the loan.
Ready to explore competitive car financing options that suit your credit rating? Get a quick quote from us today.
At Bad Credit Motor Finance, we’re here to help you find the best vehicle financing solutions that make fuel-efficient driving accessible, even on a tight budget.
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