Q. Am buying a new car next month and will be borrowing. Personal Contract Plans (PCPs) seem to be all the rage these last few years but don’t really understand it – is it the best way to borrow or would you use a bank or credit union ? I have a Audi 3 to trade in – should be at least 50% of the total cost so the borrowings won’t be a burden. Thanks for your help. David – Dundalk Co Louth

A. Thanks David. PCPs are a flexible form of hire purchase. They differ from traditional hire purchase (HP) agreements in that you are not committed to having to buy the car at the end of the term.  They also are different to conventional leasing because equity is built up in your car during the HP period.  However it can evolve into a never-ending loan something I would not be recommending. To start, the PCP buyer has to put down a deposit of up 30% of the value of the new car and then agree a monthly repayment with the dealer. This covers the cost of the car plus interest and depreciation. The car will be given a guaranteed Minimum Future Value for the vehicle at this point.  This value will be enough to pay off the outstanding lump sum at the end. There are three ways to end a PCP:  1. Hand back the keys at the end of the term and walk away with no further payments.2. Buy the car from your dealer by paying off the lump sum required.3. Swap for a new car and start a new PCP.  If you opt for a new PCP, remember you don’t own the vehicle so all you have towards the deposit on your next PCP car is the equity ( outstanding value ) that has built up in your vehicle during the loan term. If you can afford the 50% full capital repayment over a 3 year term with your bank or credit union, the latter have some exceptional car loan interest rates, you would be better off. Happy motoring !

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