PCP vs Personal Loan in Ireland | Which is Better?

  • By: Walter Dunphy ACCA
  • Date: June 7, 2022
  • Time to read: 5 min.

When you are financing your next car, you will be faced with the decision of whether to take out a personal loan or go with a PCP deal (Personal Contract Purchase) unless you are one of the lucky ones who is a cash buyer.

But which is the best one to go with? As with everything there are pros and cons to each.

In this blog post, I will take you through some things you need to consider before choosing.

What do you need to know about a PCP before you sign up?

PCP ProsPCP Cons
Likely to pay a lower APR You do not own the car until you make the final payment
Lower monthly repaymentsAdditional charges for going over agreed mileage limits
May suit those who want to regularly change carsRepayments are fixed – early repayment will trigger fees
May be rules on modifications you can make to the car

Well firstly, during the term of your PCP agreement you do not actually own the car outright. You will only take the car’s title if you decide to pay the final large optional payment.

This means that during the term of the PCP whether it is 3 years, 4 years, or 5 years you will not be able to sell the car even if you wanted to.

Your three options at the end of your PCP agreement will be the following:

1. You can hand the car back to the dealer – this is the worst option of all as you will lose the equity left in the car which could be a tidy sum of money. If you could get your hands on the cash then you would be better of to pay the final balloon payment and then sell the car on the open market to get back the equity in to your own hands instead of gifting it to the dealer.

2. You can roll into a new PCP agreement – this is a good option but if you are not putting up an equivalent deposit again you may see an increase in your monthly repayments next time around. This could end up continuing to increase if you keep rolling over into new PCP agreements.

3. OR, pay the final optional payment – you are finally free then to do whatever you want with the car. Even if you do not have the cash available to pay the final payment, there is always an option of funding the remainder with a personal loan.

Pros and Cons of Financing your Car with a Personal Loan

Pros of Personal LoanCons of Personal Loan
You can sell the car at any time and pay off the loanMonthly repayments are higher
Not mileage/wear and tear restrictionsAPR likely to be higher
You can repay earlyYou will need to negotiate your resale value
Free to make changes or alterations to the car

Using a personal loan to finance your car will most certainly give you a lot more flexibility in what you can do with the car and options when it comes to trading it in or selling it on.

Comparing the Cost of a PCP and Personal Loan

To get a good idea of how they actually stack up in money terms let us run a real life exercise to compare the costs.

The car I will be using in this example is a Toyota Yaris which has a road price of €22,070. For this example I am assuming the buyer has either a deposit or trade in valued at €5,000.

This leaves €17,070 to be financed either by PCP or a personal loan.

APR Rates Available

The rate of interest you will pay as part of a PCP agreement is generally lower than that of a personal loan. For the purposes of this example below are the APR rates we will be using:

PCP – 4.9% (Rate offered by Toyota at time of writing)

Personal Loan – 8% (An average of market rates)

The personal loan rate will differ depending on the bank you use, according to bonkers.ie the current personal loan rates for Bank of Ireland are 7.5% and AIB are offering a rate of 8.95%.

You may be able to get a lower personal loan APR if you are buying an electric or hybrid vehicle at a rate of approximately 6.5%, as there are favourable rates available from Bank of Ireland and AIB for Green loans.

Comparison of monthly repayments

The monthly payments for the PCP agreement which lasts for 3 years is €262.04, with a final optional payment of €9,481.50.

The total cost of credit works out at €1,972.28.

When we then compare this to a 5 year personal loan @8%, the monthly repayment is €346.12.

But as both finance arrangements have different terms we need to compare like with like. So lets see the position of both at the end of 3 years.

At the end of year 3 if you took the PCP option you would have just made €9,561 repayments vs €12,460 on the personal loan – €2,900 extra paid.

However, the final payment left on the PCP is €9,482 vs the balance left on the personal loan of just €7,653 which is €1,829 lower.

The overall cost difference is €1,071 which mostly is attributed to the difference in APR rates of 4.9% vs 8%.

Some points to note on this…..

You may have to pay a much higher price than €9,482 for the final optional payment, especially if you do not take good care of the car and drive more than the agreed mileage. Additional wear and tear will be factored into how much you will have to pay.

And if you end up paying much higher a price than €9,482 then you will likely lose any equity that is left in the car ( the equity is the excess of the market value over the balance you need to pay on the finance agreement).

Whereas the person who took out the personal loan may be able to get full equity out of their car if they are able to negotiate a good sales price for the car.

So Which is Better?

It will entirely depend on your circumstances. Important factors to consider are the flexibility you will need in terms of selling your car in the short term (are you a flight risk? or planning to move abroad?) and the level of mileage you will be doing.

Can you save for a future deposit at the same time you are paying PCP repayments?

If not, there is a risk you could get trapped in PCP agreements that have a slowly creeping increase in monthly repayments if you do not ever have the funds to pay the final optional payment. But there is an escape route by using a personal loan to pay for the balloon payment at the end of the PCP.

A good car salesman won’t want you walking away and convince you to drive away in a new car after the term of the first PCP agreement. Make sure whatever you choose is on your terms.

Disclaimer: This blog post is for informational and educational purposes only and should not be construed as financial advice.

Previous Post

Free Guide to Completing a Capital Gains Tax Return for Stocks and Crypto (CG1) in Ireland

Next Post

Being Made Redundant in Ireland? Here is How Much Tax You Will Pay

%d bloggers like this: