PCP car finance or bank loan

Roman Danaev

Finance17 August 2022

Those looking to get a new or used car might also be looking at car finance options. But here’s the problem - most loans are built differently. Before taking out one, you should clearly understand what each type includes and what will be required from you.

In today’s article, we’re tackling PCP vs bank loan.

Is a car loan the same as finance?

Car loans are traditionally offered by banks, whereas car finance is offered by non-bank lenders. If you want to shop around for the best bank deals, you’ll have to apply at different banks, and each credit check will affect your credit. In contrast, you can apply to dealerships or finance companies without hard credit checks.

Bank auto loans are a type of personal loans which can be used for different purposes. There are no strict rules for how you spend the money borrowed. A car finance loan, on the other hand, has a specific purpose.

Both loans are often secured against the vehicle itself, which means it can be taken away if the borrower misses a lot of payments. Sometimes, bank auto loans are secured against something else of value - another car, home equity, savings certificates, etc.

What is PCP car finance?

PCP (Personal Contract Plan) is a type of car finance.

In most cases, PCP borrowers start off by paying a deposit - typically, 10% of the car’s value, but it depends on the finance provider. The monthly payments are calculated based on the car’s guaranteed future value, which is basically how much the car will depreciate over the contract term. The GMFV (+ interest) is spread across the term period of 24-60 months.

The rest of the car’s value is optional to pay off.

  • The borrower can make the final balloon payment to become the owner.
  • They can hand the car back to the finance company.
  • They can sign up for another PCP deal.

Unlike banks, you can shop around for deals through a PCP finance broker like Carplus. You can get quotes from different dealers, compare the terms and requirements, and choose the one that suits you the most. Carplus will always help you along the way!

  • Potential positive equity
  • Multiple options at the end of the term
  • Allows you to easily change cars
  • Available for people with bad credit
  • Flexible payment options
  • Balloon payment can be expensive
  • Charges for excess mileage
  • Limits on wear and tear

What is a personal loan?

A personal loan is a bank loan that can be used for any purpose. In the context of this article, the terms “personal loan”, “ bank loan ”, and “auto loan” will be used interchangeably and refer to loans for the purpose of buying a car.

Before you apply for a bank loan, you will need to determine the amount to borrow. You can borrow less than the car’s worth and use your own savings to pay for the rest. Or you can go the other way and borrow more. What to spend it on is up to your - urgent car repairs, other purchases, etc.

A typical loan term length is 12 to 60 months. The full amount borrowed (+ interest) will need to be repaid by the end of the term.

  • No mileage, wear and tear, or modification restrictions
  • Lot of options at major banks
  • Builds equity
  • Depreciation
  • No way to exit
  • Hard to get for people with low credit

Is getting car finance easier than a loan?

Yes, car finance is often easier to get. Car finance companies only do soft checks and don’t have strict requirements for borrowers. Banks tend to refuse applications for the following reasons:

  • Poor credit score
  • Limited credit history
  • Large amount of debt
  • Errors in the application

Basically, if you have an average or bad credit rating, you’re more likely to get approved by a non-bank lender. The lender will require you to pay a higher interest, but the same would be true in a bank, too.

Take this with a grain of salt. Each individual case is reviewed individually. We can make assumptions based on previous cases, but yours will have factors that are different from others.

What is cheaper: Car finance or a loan?

If your main goal is to keep your monthly payment to a minimum, PCP is the better option. If you opt out of the final payment, the amount you spend on the car will be kept relatively low.

With PCP, you will only pay for how much the car has lost in value. And in the best-case scenario, you might be able to pay even less. Even if the finance company underestimates depreciation, they can’t charge you more after the term has started.

If you want to buy the car (i.e., your bottom line is to become the legal owner), the cheapest option between a car finance contract and a personal loan will depend on several factors:

  • Your credit score and history
  • Contract length
  • Company or bank you work with
  • Whether you pay the deposit, and more

Luckily, it’s easy to compare different deals to determine the cheapest option for you personally.

What is the difference between PCP and a bank loan?

Before talking about each difference in detail, let’s look at the short rundown.

PCP vs Bank Loan
PCP Car FinanceBank Loan
Deposit + monthly payments + optional final paymentMonthly payments
Ownership transferred after the balloon paymentImmediate ownership
Insurance costs sometimes covered by the lenderInsurance costs not covered
Maintenance at approved garagesMaintenance can be done anywhere
Flexible payments, three options by the end of the termLimited flexibility
Easy to terminate earlyThe loan must be paid in full

Here’s one more difference worth repeating - it’s harder to get approved for a bank loan than for a PCP agreement. Banks are much more thorough and have stricter requirements for borrowers. So, people with bad credit are more likely to get approved for PCP.

Loan structure

The differences in the loan structure are most noticeable at the beginning and end of the contracts. PCP has several types of payments involved:

  • A deposit contribution in the beginning (may not be required depending on the payment)
  • Monthly payments with interest included (the same as with a bank loan)
  • Balloon payment (optional, depends on whether you intend to keep the car)

Important note: you may remember from earlier that monthly payments cover different things in these types of loans. With PCP, they cover the car’s GMFV. With bank loans - the car’s total value.

With a bank loan, the structure is simpler. There is just the loan amount, which borrowers need to repay in instalments with interest.

PCP loan structure example

Let’s take a new Ford Fiesta worth £18,655 as an example.

You enter a 24-month PCP agreement with a lender and make a £2,000 deposit right away. The provider predicts that the car will lose £8,000 after three years. This means that you will only be borrowing £6,000 - that’s £250 + interest per month.

If you want to buy out the car, you will need to pay the rest of the car’s worth.

Bank loan structure example

Suppose you want to get a car loan from a bank for two years. In this case, you will need to borrow the full amount - £18,655 - to pay for the car upfront. They agree to loan you the money, which you then take to the dealership and purchase the car.

Your monthly payment will be £777 + interest.

Transfer of ownership

Under a PCP agreement, legal ownership remains with the finance company until or if you make the final balloon payment. You need to keep this in mind throughout your loan agreement because it will affect what you can do with the car. You won’t be able to sell it, exceed the mileage limit (more about PCP mileage limits) and wear & tear restrictions, or make major modifications.

With a bank loan, you essentially pay for the car outright in cash. So, you instantly become the owner of the car. Things that you wouldn’t be able to do with a financed car don’t apply here.

Insurance treatment

Let’s start with similarities first. With both contracts, you will be responsible for getting and paying for insurance. Even if you’re not the legal owner, you’ll be the registered keeper, the title that the insurance policy holder must have. You will also need to arrange guaranteed asset protection (GAP) insurance.

Now, the differences. PCP car finance deals may include insurance, which would lower your car-related costs. Make sure to check with the provider first. The same exception is not possible with a bank loan.

Service and repairs

Whether you get a PCP loan or a personal bank loan, you will be responsible for car service and repairs.

With PCP, there will be a mandatory requirement to use one of the provider’s approved garages. Lenders don’t want to take on the risk of independent garages. From your perspective, you don’t want to risk invalidating the GMFV.

If you buy the car with a personal loan, you can use any garage you want. Before taking your car to an independent garage, though, do your research. While you have the freedom to get your car serviced anywhere, you also want to work with reliable mechanics.

Payment flexibility

As mentioned earlier, lenders give you three options at the end of PCP finance agreements. You can choose whatever one fits your future plans. If you don’t want to keep the car, you don’t have to pay its total value. Also, you can extend or shorten the contract term, which lenders don’t usually mind.

You can also choose the repayment term for bank loans. But the difference is that you can’t opt out of paying the full amount. After the contract has been concluded, you are legally required to make all the payments as agreed.

Early settlement

PCP contracts have the voluntary termination clause, which is protected by the Consumer Credit Act of 1974. Once you’ve paid half of the loan, you’re allowed to exit the agreement early. This means you can simply take the car back to the lender or dealership and walk away without any financial commitments.

Personal bank loans need to be paid in full. You can do it early, which is often followed by early termination. You can’t take the car back because you’re the legal owner.

Is PCP car finance right for me?

PCP is a great option for people who want to keep their monthly car payment to a minimum while also enjoying flexible terms and having options at the end of the PCP contract.

This finance option is particularly popular among people who like switching up cars. You don’t have to bother selling the car to another person. Just roll into the dealership on one car and leave on another - PCP is perfect for that.

People with poor credit will usually pay higher interest rates. But consider this - it’s much better to finance a car, albeit with a slightly higher over cost, than to not get approved at all (which is often true with institutional lenders).

Is a personal bank loan right for me?

A personal bank loan can be optimal if you don’t want your car used as collateral. But bear in mind that if you default on an unsecured bank loan, they will come after you, most likely with a lawsuit. The loan amounts are also smaller because banks try to minimise risk. So, you may not be able to get the car you want.

Personal loans make sense for numerous reasons. But they make less sense if used for purchases that could qualify for a better loan type.​ This includes real estate, education, and, of course, cars. Mortgages, student loans, and car loans are those types of loans. So, car loans will have features and benefits that personal loans can’t offer.

What are the alternatives?

Your car loan options are not limited by PCP or bank loans. Here are a few other arrangements to consider.

Hire Purchase

Hire Purchase deals are structured similarly to bank loans. Depending on the lender, you will or will not have to pay a deposit, and then the rest of the car’s value will be spread out across even monthly instalments. By the end of the term, you just make your regular payment - no need to make the lump sum payment.

But in terms of convenience and approval rates, it’s closer to PCP. You also don’t own the car before the loan is paid in full. Read more about the differences between HP and leasing in our articles - HP vs Leasing


Leasing is structured entirely differently than all deals described so far. You only have to pay the difference between the car’s value at the start and end of the term. But the catch is that you don’t build equity and have to hand back the car at the end of the contract.

Lenders can also offer this deal as Personal Contract Hire (PCH) or Business Contract Hire (BCH). Learn more about the differences between PCP and leasing in our articles - PCP vs Lease

Lease purchase

Leasing is very similar to PCP. In both scenarios, you pay for the car in monthly instalments, and there is a balloon payment in the end.

But PCP gives you a way out, where you can hand the car back and avoid paying it. With lease purchase, you’re not offered an exit option - you have to purchase the car. If you’re not sure whether owning the car at the end of the loan term is right for you, consider something other than a lease purchase.

Let’s conclude

The biggest differences between a PCP finance scheme and a bank loan lie in the loan structure and approval rates. Finance involves three types of payments (deposit, monthly instalments, and optional lump sum payment) and is easier to get approved for. Smaller differences have also been detailed over the course of the article.

Let’s be clear - while both are loans for the purpose of buying a car, there are more differences than similarities. So, take your time before choosing.

Carplus offers great PCP deals on any car you want! We only work with approved dealerships. You will get the answer from us in a matter of minutes - get a quote!

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