What car finance option is the best for me?
There are more ways than ever to finance a car. Read our guide to find the best fit for you…
Key takeaways
It's important to look into the different leasing options to find the right type for you and your budget
Consider affordability, mileage, and the duration that you would like to finance a car for
Personal Contract Hire (PCH) tends to be significantly cheaper than PCP or HP
There are plenty of options to choose from if you need to finance a car purchase – from car loans to leasing. But trying to work out which will best suit your circumstances can feel challenging.
Here, we walk through the main types of car financing routes, from hire purchase deals to using personal car loans, to help you decide.
What types of car financing options are available?
These are your main options for financing a car:
Personal contract purchase (PCP)
You take out a loan when you buy the car, which covers the amount of value the car loses over time (its depreciation).
A PCP deal usually lasts for two or three years, and at the end of the contract, you can buy the car outright - usually by making a large balloon payment.
Pros
Flexibility: Once your term ends, you can buy your car for a reduced fee, get a new PCP deal, or simply return the car and walk away.
Cheaper monthly payments: Could be less than two-thirds of what you’d pay with HP because you’re mainly covering the depreciation.
Lower deposit: You won’t have to put down a large sum upfront. An initial deposit could be as low as 10%.
Cons
Limited choice: PCP is usually only available for newer cars worth £10,000 or more with limited miles on the clock.
Expensive final payment: If you want to keep the car at the end of the deal, you’ll have to stump up a large final ‘balloon’ payment.
Mileage cap: Your lender will impose conditions such as an agreed mileage limit - you’ll have to pay a fee if you exceed it.
Hire purchase (HP)
You’ll make monthly payments to your lender and only own the car outright once you’ve made all payments. Typically, HP is offered on cars worth £10,000 or more.
Pros
Flexibility: You can tailor the length of the deal to your requirements. For example, you could choose a longer deal with lower monthly payments.
Keep the car: Once you’ve made the final payment, the car is yours. There’s no big lump sum at the end as with PCP.
Option for bad credit: Your credit score will be taken into account, but because an HP deal is secured against the car, it should be easier for people with poor credit
Cons
Higher monthly payments: Month to month, hire purchase is usually more expensive than PCP
Increased cost: However the deal is structured, you are likely to pay more with HP than if buying the car outright
Missed payments: The HP deal is secured against the car, so if you’re struggling to keep up with monthly payments the car could be repossessed
Personal contract hire (PCH)
Long-term car rental or leasing where you hire a car for several years in return for regular monthly payments.
It’s not a loan, so there’s no interest – but the car isn’t yours, and you won’t get to keep it afterwards.
Pros
Flexibility: The rate will be fixed in advance, but you should be able to switch to a new, long term rental car every few years
Cheaper payments: It’s usually significantly cheaper than either PCP or HP each month because you’re not buying the car
Reliability: You’ll get to drive a car you have confidence in
Cons
Deposit required: You’ll still have to pay a deposit of around six months of the lease
More expensive with bad credit: The best options are usually only available to people with a high credit score
You’re not the owner: The dealer owns the car and you’ll be charged extra for any damage or if you go above the agreed maximum mileage
Car loans
A car loan is a personal loan that you can take out to buy a new or used car. Once you’ve been approved for a loan, you can choose to buy from a car dealer or a private seller.
Pros
Buy any car: A car loan will provide you with the money to purchase the vehicle of your choice upfront.
No restrictions: Unlike other forms of car finance, you are the owner from the start and can drive, modify or sell the car whenever you like.
Flexibility: You can spread the loan out over a longer period to pay less each month if you prefer - although you’re likely to end up paying more overall this way.
Cons
Availability for bad credit: You can get a loan with bad credit, but be prepared for higher interest rates.
Limited borrowing: You might find the amount you can borrow limits the choice of car you can buy and you have to opt for a cheaper model
Debt burden: Taking on a high level of debt for a car purchase could make it difficult to gain credit in other areas
What is the best car financing option for me?
When deciding how to finance your car, you should think about how much you can afford to borrow and pay each month, as well as how many miles you’ll drive and how long you’ll want the car for.
These factors should help you decide on the best car financing option for your needs:
Personal loan | HP (Hire Purchase) | Personal Contract Purchase (PCP) | |
|---|---|---|---|
Deposit needed | No | Likely | Likely |
You own the car straight away | Yes | No | No |
You’ll own the car at the end of the deal | Yes | Yes | No (unless you pay off the remaining balance – but this is likely to be a large final payment) |
Secured (against the car) | No | Yes | Yes |
Excess mileage charges | No | No | Yes |
Monthly payments | Yes | Yes | Yes (are often lower due to the balloon payment) |
Available with bad credit | Yes, but expect high rates | Likely | Likely |
How much does car finance cost?
The cost of your new wheels will depend on which type of car finance you choose, plus the term you opt for, and the amount of interest added.
This table compares the different types of car finance (PCP, HP and taking out a personal loan) factoring in the deposit and interest rate applied or APR:
Hire Purchase | Personal Contract Purchase | Personal Loan | |
|---|---|---|---|
Car Value | £15,000 | £15,000 | £15,000 |
Deposit | £1,000 | £1,000 | £1,000 |
Total Borrowing Price | £14,000 | £14,000 | £14,000 |
Representative APR* | 9.9% | 9.9% | 6.1% APR |
Monthly Cost (3 Year Term) | £448 | £287 | £426 |
Total Cost of Credit*** | £2,141 | £3,073 | £1,318 |
GMFV - Final Payment | £10 | £6,750** | None |
What is the average car payment in the UK?
The average car payment depends on the type of car finance and the term of the loan:
Hire purchase: For a 36-month term, the monthly cost is around £266.46 per month, with a total cost of credit of £1,602.48*
Personal contract purchase (PCP): For a 36-month term, the monthly cost is around £286.75 per month, with a final payment of £6,750*
Car lease: Between £300-£400 per month*
Car loan: Depends on the borrowing amount and interest rates - the average loan taken out to fund a car purchase was between £7,500 and £14,999 in September 2024*
*Based on MoneySuperMarket data from September 2024
What do I need to consider when choosing a car finance option?
Here are some key things to think about when looking for car finance:
Are you looking for a new or used car?
How strong is your credit score?
With better credit, you’ll be eligible for more deals at better interest rates too. This might make a personal loan more cost-effective. If you have a weaker credit score, alternative car finance, such as hire purchase, could be cheaper.
Do you want to own the car at the end of the finance deal?
Decide whether you’d prefer higher monthly repayments but own your car outright (paying off a car loan or hire purchase, for example). Or pay less each month but not necessarily own your car at the end of the deal term (leasing or PCP).
How do you plan on using your car?
Remember, some finance options, such as PCP deals, set limits on your mileage.
How much money can you spare for an initial deposit?
If you can put down a bigger deposit, it should reduce your monthly payments.
What are the conditions?
Understand how long you’re tied in for and what happens if you need to back out part-way through because you can’t afford the repayments or decide you don’t need the car any more. Also, check on extra costs, such as administration fees and regular servicing charges.
What is the cheapest type of car finance?
A Personal loan is often the cheapest way to borrow money to buy a car if you have a good credit rating, as you'll get access to the best interest rates.
In terms of car finance, PCP is a cheaper option than HP, as you're only paying back the expected depreciation of the car, plus interest, rather than the full purchase price.
Can I negotiate my car finance?
Whether you can negotiate your car finance deal or not will depend on where you're taking out finance from. Dealerships and finance providers may have some flexibility, depending on your current credit score and borrowing history.
Can I switch my car finance to another car or provider?
You can't switch your car finance from one car to another. Each car finance agreement is tailored to the specific car, your financial situation, and the agreed-upon repayment terms.
However, you can switch car finance providers or refinance your current loan:
Switch providers: You can switch to a different finance provider if you find a better rate or want to consolidate debt. To do this, you'll need to get a settlement figure from your current lender and then contact the new provider.
Refinance: You can refinance your current loan to get a new loan agreement with the car you want. Refinancing can be a good option if you can't pay off your loan in full.
If you're thinking about changing your vehicle, you can contact your current lender to discuss your options. You can also consider your circumstances and why you want to transfer your finance.
Is it possible to cancel my car finance agreement?
Yes, you can cancel a car finance agreement, but it depends on the terms and conditions of your contract:
Cooling-off period: You can cancel a car finance agreement within 14 days of signing the contract without penalty if the agreement is for £25,000 or less. You must repay the creditor the amount of credit provided, and the interest accrued on it.
Voluntary termination: You can end your agreement early by returning the car to the finance company if you've paid off a certain percentage of the total amount due. This is called "voluntary termination". You typically need to have paid off at least half of the car's cost. If you paid more than half the cost of the car, you won't get anything back.
Early settlement: If the car's current value is more than your remaining payments, you might be better off paying a settlement figure to the finance company and then selling the car.
You should assess your current financial situation to be sure that you've exhausted all options available to you. You should also consider the reasonable care aspect of the financing agreement.
Personal Finance & Insurance Expert
Our expert says
Buying a new car is a big investment and it needs serious consideration. Before you even think about the make and model and start to plan your first road trip, you need to work out how you will pay for it.
There are lots of options here and it can be overwhelming so the first thing to look at is your budget and if you want to pay for the car outright, with a car loan for example, or if you’re happy paying for it over a set period of time, such as through a HP or PCP deal.
There are pros and cons of all the options so take some time to work out how much each would cost you and which you’re most comfortable with. Don’t just think about now either, whatever decision you go for you need to be happy with it over the next few years – especially as most finance deals last for at least three years.
Can I be turned down for car finance?
Yes, you can be declined car finance, especially if you have a poor credit history or have been refused finance before. Lenders can also refuse your application depending on your job stability and income.
For example, if you're on a short term contract at work, lenders might see you as higher risk, as you may not be able to afford the payments if your contract doesn't continue after this point.
To ensure you have a good chance of being accepted, check your credit history and aim to keep a good credit score before applying for car finance.
How does car finance affect my credit score?
Car finance can have a positive or negative impact on your credit score, depending on how you manage it:
Initial credit checks: When you apply for car finance, the lender will typically perform a hard credit check, which can temporarily lower your credit score. Too many hard credit checks can negatively impact your score.
Repayments: Making on-time payments can improve your credit score. Missing or late payments can negatively impact your score.
Defaulting on the loan: If you don't repay your loan after being declared delinquent, your lender will declare your loan in default. This can result in debt collectors contacting you, and your car being repossessed. Both defaulting and repossession will remain on your credit report for seven years.
To help improve your credit score, try to make on-time payments, avoid too many hard credit checks, use soft checks when possible, and budget for the cost of repayments.
It can take up to three months for information about your payments to reach credit referencing agencies (CRAs). This means it can take at least that long for a good repayment track record to start improving your credit history.
Other useful guides
We have a range of useful guides to help you with your car finance decision:
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Tim Heming
Personal Finance Expert
Tim Heming is a journalist and editor who has written about personal finance for national newspapers and consumer websites for 15 years. Tim enjoys providing no-nonsense information to help consumers...
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Collette Shackleton is a highly skilled Content Writer who has over nine years’ experience creating helpful and engaging personal finance content for consumers. Collette shares her experience as a...
