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…
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.
What do I need to consider when choosing a car finance option?
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 to have 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 ordecide you don’t need the car any more. Also, check on extra costs, such as administration fees and regular servicing charges.
What are my car finance options?
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’ll have the option to buy the car outright - usually by making a large balloon payment.
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%.
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.
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
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.
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
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
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.
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 you?
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. Our table gives an example of the costs.
HP (Hire Purchase)
Personal Contract Purchase (PCP)
You own the car straight away
You’ll own the car at the end of the deal
No (unless you pay off the remaining balance – but this is likely to be a large final payment)
Secured (against the car)
Excess mileage charges
Available with bad credit
Yes, but expect high rates
Other useful guides
We have a range of useful guides to help you with your car finance decision:
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