What is the best way to finance a car?

What do I need to consider when choosing a car finance option?

There are plenty of options to choose from if you need to finance a car purchase – from car loans to leasing. But it can feel difficult trying to work out which will best suit your circumstances. Here we walk through the main car finance routes and their pros and cons, to help you with your decision.

The best finance option for you will depend on your personal situation. When you’re deciding which type of car finance works best for you, there are a few things you should consider: 

• Are you looking for a new or used car? You might have different finance options if your car has been pre-owned. With a car loan you can use the funds to buy new or used, whereas with a PCP deal or leasing contract you’re more likely to use it to fund a new car purchase 

• How strong is your credit score? With better credit, you’ll be eligible for more deals – and you’ll get better interest rates too. This might make a personal loan a more cost-effective way to purchase a car, compared to other types of finance. If you have a weaker credit score alternative types of car finance, such as hire purchase, could be cheaper 

• Do you want to own the car at the end of the finance deal? Would you prefer to have higher monthly repayments but own your car outright, or pay less each month but not own your car until the end of the deal term? With a loan you’ll own your car from day one when you pay for it, but with a PCP deal or with leasing you won’t own the car for the duration of the plan 

• 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, you’re likely to get better terms for hire purchase

Which car finance option is best for me? 

There are plenty of different ways to finance a new car. To help you decide, here’s what you need to know about each type of car finance and how they work... 

Personal contract purchase (PCP)

With PCP, you take out a loan when you buy the car – but instead of the cost of the car, your loan covers the amount of value the car loses over time (its depreciation). A PCP usually lasts for two or three years, and at the end of the contract you’ll have the option to buy the car outright - usually by making a large balloon payment. PCP is usually only available for cars worth £10,000 or more. Further details include:

• Flexibility: PCP gives you plenty of options – 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. You can also end the deal early by paying off the difference between the car’s current value and the amount you still owe 

• Monthly payments: PCP deals are likely to be cheaper relative to other forms of car finance. For example, your monthly payments could be less than two-thirds of what you’d pay with HP. But if you want to keep the car afterwards, be prepared for a ‘balloon payment’ – which can be a big expense

• Deposit required: Usually 10% or more

• Availability for bad credit: Dealers will check your credit history, and the best deals are usually reserved for people with high credit scores

• Who owns the car? Your lender owns the car, and they’ll impose conditions – for instance, you’ll need to keep to an approved maximum mileage 

• Available on used cars? Yes – but only if the car is less than nine years old and has fewer than 100,000 miles on the clock 

Hire Purchase (HP)

A hire purchase means you’ll make monthly payments to your lender – but technically, you’re paying to hire the car from them. You’ll only own the car outright once the contract term has ended and you’ve made all payments. Typically HP is offered on cars worth £10,000 or more.

• Flexibility of deals: You can tailor the length of the deal to your requirements – choose a longer deal with lower monthly payments, or a shorter deal to reduce the amount you pay overall 

• Monthly payments: Month to month, hire purchase is usually more expensive than PCP – but if you’re planning to keep the car once it’s done you won’t need to pay a big lump sum at the end

• Deposit required: Usually 10% or more

• Availability 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

• Who owns the car? Your lender owns the car until the end of the deal – so you can’t sell it or trade it in until the last payment 

• Available on used cars? Yes

Personal Contract Hire (PCH)

Personal contract hire is essentially a long-term car rental – you can 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.

• Flexibility of deals: PCH deals are fairly inflexible. It’s a rental, so the rate will be fixed in advance. However, you should be able to switch to a new car every few years 

• Monthly payments: Since you’re not buying the car, PCH is usually significantly cheaper than either PCP or HP

• Deposit required: Usually there’s an initial payment of around 6 months’ lease

• Availability for bad credit: It’s possible to get a deal with bad credit, but the best options are usually only available to people with a high credit score

• Who owns the car? Your dealer owns the car – and you’ll be charged extra for any damage, or if you go above the agreed maximum mileage 

• Available on used cars? Yes

Car loans

A car loan works like any other unsecured loan – you borrow a sum of money from a lender and use it to buy the car. It’s worth considering if you have a good credit score. There shouldn’t be any extra fees or charges on your loan, but interest rates for personal loans can be relatively high – and the rate will be determined by your credit score.

• Flexibility of deals: You’ll be able to decide how long the loan should last, and how much you want to borrow – just make sure you keep on top of your repayments 

• Monthly payments: It all depends on your credit – a loan could be the cheapest option if your credit is good, or the most expensive if it needs improving

• Deposit required: None

• Availability for bad credit: You can get a loan with bad credit, but be prepared for higher interest rates

• Who owns the car? You do – it’s all yours as soon as the paperwork’s signed 

• Available on used cars? Yes – once you’ve taken out a loan, the money’s yours to spend however you like 

What else do I need to consider?

 

Before you pick a car finance deal, consider the following:

• What cars are available? Some options, like PCP or PH, tend to only be available on more expensive vehicles. But with a car loan, you can buy any car you like 

• How long is the term? A PCP deal lasts for a set period of time – but others might offer you more flexibility

• Can I back out of the deal? If you choose PCH, you’ll have to pay a hefty fee if you decide you don’t need your car anymore. Make sure you won’t be trapped in a deal that might not suit your needs a few years down the line

• Who covers extra costs? The cost of routine maintenance can stack up over the years – make sure you know if your lender will cover it, or if it’s your responsibility

• Are there any extra fees? Low monthly payments might look great, but there could be extra fees and charges buried in the paperwork 

Other useful guides

We have a range of useful guides to help you with your car finance decision: 

• Car finance vs bank loan

• Hire Purchase vs leasing  

• PCP vs HP

Compare car finance deals with MoneySuperMarket

It’s quick and easy to compare and choose a great car finance deal with MoneySuperMarket. We’ve teamed up with our car finance partner Motiv to bring you the best deals on the market from over 30 leading lenders. We’ll help you compare quotes by size, duration, and interest rate, so you can find the perfect deal for your needs.