Car finance over the years has gained immense popularity with this market reaching approximately £310 billion in the UK.
With such a huge market, the choices can seem overwhelming.
So many options are available - Personal Contract Purchase (PCP), Hire Purchase (HP), Leasing, or a traditional loan – but which one is best suited for your situation?
In this guide, we go into detail exploring the pros and cons of each.
Look out for expert tips and advice along the way.
At Motorfinity our car finance experts have years of experience in this field and these tips will help you to get your dream car without having a bigger impact on your overall finances.
Car finance is a loan used to buy a car typically offered by banks, finance companies, or dealerships.
Instead of paying upfront, you make monthly payments with added interest over a set period.
For those who can't afford the full cost, financing options help spread payments over time, making it more accessible.
To find out more about car finance and the advantages of each, check our detail guide on car finance.
[Image: Car Finance Concept]
Do I need car finance?
Before considering the finance options to buy your next car it is important to ask yourself a very important question: Do I really need a car finance? Car finance is a good option if you can't afford to buy a car outright, as it spreads the cost over time. but it can significantly increases the total cost of ownership that can lead to a long term financial strain.
Kelly Smith
Finance Account Manager
"Before financing a car, thoroughly evaluate your current financial status, including existing debts, income, and expenses, to ensure you can comfortably afford the new car payments"
Why Choosing the Right Car Finance Option Matters?
Here are few of the reasons about why the right car finance option matters:
It ensures that your monthly payments are affordable without straining your budget, helping you avoid potential financial stress.
Different lenders offer varying interest rates, loan terms, and fees, which can significantly affect the total cost of the car over time.
Selecting a loan with a lower interest rate could save you thousands, while longer loan terms might lower monthly payments but increase overall interest costs.
Your choice affects your credit score. A well-managed car loan can improve your credit profile, making it easier to secure better terms for future loans, such as mortgages.
Choosing a finance plan that stretches your budget too thin could lead to missed payments, harming your credit score.
Kelly Smith
Finance Account Manager
"Different lenders offer varying interest rates. Shop around to find the best rate for your car loan, just as you would when refinancing other types of loans. Even a small difference in the rate can significantly impact the total cost of the loan."
The Types Of Car Finance Options Available?
The available car finance options give you different ways to pay for a car, depending on what works best for you. These options include Personal Contract Purchase (PCP), which lets you choose whether to buy or return the car at the end of the contract, and Hire Purchase (HP), where you spread the cost and own the car once all payments are made.
You can take out a personal loan to buy the car upfront.
There's Lease Purchase is similar to PCP but requires you to buy the car at the end, and Personal Contract Hire (PCH), (Leasing), where you rent the car with no option to buy.
0% Interest Dealer Finance is available from some dealerships, offering interest-free payments, while Bank or Building Society Loans provide a traditional way to finance your car.
Credit Card payments can be used for part or all the cost, and salary sacrifice schemes like the NHS Car Scheme offer special deals through your employer with potential tax savings.
[Image: Types of Car Finance Options]
PCP
Personal Contract Purchase (or PCP) is the most common type of car finance. The 2023 data shows that 80% of the total car finance in the UK were PCP deals.
In PCP, you pay low monthly payments and have the option to either buy the car at the end of the contract or return it.
When Should I go for PCP?
PCP is a good option when you are primarily focused on keeping your monthly payments low and prefer flexibility at the end of the term.
Here's when you might consider PCP:
Affordability: If your main concern is finding the most affordable option with manageable monthly payments, PCP offers lower payments compared to traditional finance methods.
Flexibility: At the end of the PCP agreement, you have three options: Return the car, pay a final balloon payment to own it, or trade it in for a new vehicle.
Avoiding Confusion: PCP is straightforward because you know from the outset what your monthly payments are and what your options will be at the end.
Pro Tip
"Great option if you are looking to keep immediate costs down."
Pro Tip
"It is ideal if you are unsure about long term car ownership or you like to change cars regularly."
Kelly Smith
Finance Account Manager
"Keep in mind that with PCP, it's essential to be realistic about your borrowing needs and stick to your budget.
You'll also need to adhere to mileage limits and keep the car in good condition to avoid additional fees, which could increase the overall cost.
If you prioritise affordable monthly payments and flexibility at the end of the term, PCP may be a good option.
Is PCP Actually Cheaper As Compared to Other Car Finance Options?
One answer: It depends.
PCP is cheaper on a monthly basis but can be more expensive in the long run if you decide to keep the car or don't manage mileage and condition limits carefully. It's best suited for those looking for lower upfront and monthly costs with flexibility at the end, but it's not necessarily the cheapest option overall.
Kelly Smith
Finance Account Manager
"When financing a car, remember that your monthly payments are just part of the cost
Consider insurance, fuel, maintenance, and any loan fees when calculating the cost of car ownership. Plan your budget accordingly to avoid financial strain."
Is PCP Interest Rate Often Higher Higher as Compared to Other Car Finance Options
The interest rates for PCP can often be higher in some cases, depending on the deal, provider, and credit score.
In the UK the current APR rates for PCP deals typically range from around 5% to as high as 14%, but can sometimes go up to 20% for used cars or customers with lower credit scores.
Credit Score and PCP
The interest rates for PCP can often be higher in some cases, depending on the deal, provider, and credit score.
In the UK, the current APR rates for PCP deals typically range from around 5% to as high as 14%, but can sometimes go up to 20% for used cars or customers with lower credit scores.
With a poor score, lenders may require a larger deposit and stricter terms, which can limit your flexibility when financing future vehicles.
Pro Tip
"You can lower your credit score by keeping your debt-to-credit ratio low. Avoid maxing out your available credit by maintaining a balance of less than 30% of your credit limit."
Advantages and Disadvantages of PCP
PCP offers lower monthly payments and flexibility at the end of the agreement, but you never fully own the car unless you pay the final balloon payment. There are also mileage limits and potential fees if exceeded. For a detailed pros and cons of PCP, check our article on PCP vs HP: Which One Should I Choose? where we discuss its
Hire Purchase
Hire Purchase (HP) is a straightforward finance option where you pay higher monthly payments compared to PCP, but you own the car outright at the end of the term.
There are no mileage restrictions, making it ideal if you plan to keep the car for a long time.
When Should I go for HP?
Hire Purchase (HP) is a suitable option under the following circumstances:
You Want to Own the Car:
If your primary goal is to eventually own the vehicle outright without a large final payment, HP is ideal.
Unlike PCP, where ownership depends on paying a large balloon payment at the end, HP spreads the full cost of the car over the term of the loan, with no surprise payments at the end.
Avoiding Mileage or Condition Limits:
HP doesn't come with mileage restrictions or condition limits like PCP. This makes it a better option for people who drive a lot or don't want to worry about penalties for excess wear and tear.
Straightforward:
It avoids the complexity of PCP end of term conditions. It can provide peace of mind with clearer long-term costs.
Higher Credit Risk:
If your credit score isn't great, HP might be a better option because, since the car itself is collateral, it can be easier to qualify for other finance options.
Kelly Smith
Finance Account Manager
"With Hire Purchase (HP), budgeting becomes easier since the fixed monthly payments allow you to plan your finances confidently. Knowing exactly what you'll pay each month helps avoid unexpected financial strain, making HP a predictable and manageable option for those looking to own the car outright."
Is Interest Rate Higher in HP
The interest rates for Hire Purchase (HP) are typically lower compared to Personal Contract Purchase (PCP), but it depends on various factors like the lender, car type, and credit score. It is generally low risk.
Credit Score and the HP
A better credit score can lead to lower interest rates, making your monthly payments more affordable and the overall cost of ownership lower.
Since HP involves financing the full cost of the car, a higher credit score can greatly reduce the total interest paid over the loan term.
[Image: Car Finance Concept]
Personal Loan for Car Finance
A personal loan for car finance is a type of unsecured loan that allows you to borrow money from a bank, building society, or another lender to buy a car outright.
Unlike PCP or hire purchase agreements, where the car is owned by the finance provider until the loan is fully repaid, with a personal loan, you own the car from the moment of purchase.
Unlike PCP or hire purchase agreements, where the car is owned by the finance provider until the loan is fully repaid, with a personal loan, you own the car from the moment of purchase.
How Does a Personal Loan Work
To see how it works see the following example:
Sarah wanted to buy a Toyota CHR 2024 for £25,0000 (only because she got it through Motorfinity) but didn't have the full amount. She applied for a personal loan from her bank, which offered her a loan at 6.5 interest due to her good credit score.
After getting the loan, she immediately paid for the car and became the owner on the spot. Unlike other finance options, she wasn't restricted to certain dealerships and didn't have mileage limits or a big final payment. Now, she pays a fixed amount every month, knowing exactly what she owes until the loan is paid off in five years.
Is Getting a Car on Personal Loan Cheaper?
This depends on several factors including your credit score and the loan's interest rate.
Unlike PCP, you don't benefit from lower monthly payments, and there are no built-in options for returning the car or trading it in.
If you plan to keep the car and have the financial means to manage higher monthly payments, a personal loan can be more cost-effective over time since you fully own the car from the start without any balloon payment or mileage restrictions.
Kelly Smith
Finance Account Manager
"When taking out a personal loan for a car, it's essential to be realistic about your borrowing needs. Borrowing more than necessary can increase your monthly payments and the overall cost due to interest. Stick to your budget and avoid upselling yourself on features you don't truly need."
If Your Credit Score is not Ideal on PCP
If your credit score isn't ideal, Hire Purchase (HP) might be a better option compared to PCP or a personal loan.
HP is more accessible to those with lower credit scores since the loan is secured against the vehicle.
Though interest rates may still be higher, HP allows you to spread the cost and guarantees ownership at the end.
Pros and Cons of Personal Loan for Car Finance
Pros
Flexibility: Unlike PCP or HP, a personal loan isn't tied to the vehicle. You own the car outright from the start and can sell it whenever you want without restrictions.
No Deposit: With a personal loan, there's no need for a deposit, which makes it a good option if you don't have upfront savings.
Fixed Interest Rates: Many personal loans offer fixed interest rates, giving you certainty over your monthly payments and total cost throughout the term
No Mileage or Condition Restrictions: Since the car isn't secured by the loan, there are no mileage limits or condition requirements that could lead to additional fees.
Cons
Higher Credit Score Requirement: To get a competitive rate, you often need a good to excellent credit score. Those with lower scores may face higher interest rates compared to PCP or HP deals.
Ownership Risks: Since you own the car from the outset, you bear the full depreciation risk, which can be significant over time, especially with new cars.
Potential for Higher Costs: Depending on your credit score and loan terms, personal loans can have higher interest rates than HP or even some PCP deals, making them more expensive in the long run.
Harder to Budget: Without the flexibility at the end of the term (like with PCP), you'll be paying off the full value of the car, which could make your monthly payments higher than with other car finance options.
Buying a Car Using Credit Card?
This is another financial option to purchase your car. It has its own set of pros and cons. It offers great flexibility and protection but often comes with high interest rates if not paid off quickly.
It is best for lower priced cars, with alternatives offering more affordable financing.
Do Credit Cards Have High Interest Rates
Yes, credit cards often have higher interest rates than other finance options, especially after any introductory 0% interest periods end.
This makes the total cost of the car significantly higher if you can't pay off the balance quickly.
Not all dealerships accept credit card payments due to the processing fees involved, which adds another level of complexity.
Is a credit Card Ideal for Expensive Cars as Well?
A credit card can be a good option for smaller or mid-range vehicles, but not for more expensive cars. The high credit card interest rates can quickly outweigh any benefits, especially for large sums.
Many dealerships impose restrictions on using credit cards for high value transactions due to processing fees.
Most credit card limits aren't sufficient for expensive cars.
Alternative financing options like Personal Loans, PCP, or HP typically offer lower interest rates and more manageable terms, making it a more practical choice over time.
0% Finance Options
0% car finance deals are a tempting option for getting a car and are increasing in popularity.
It's simply a way to buy a new car without paying interest.
You spread the cost over time, typically making monthly payments for a fixed period.
It's used by dealerships or online car brokers mostly as a marketing tool to get more people interested in buying cars, as the idea of getting a car with 0% is hard to pass by.
Are They Really Genuine
The most important question is: Is it really true? If it is true, then what is the benefit of this for a seller? If they are not earning interest, how are they are earning?
The answer is: Yes, they are genuine and true, but they have some important caveats which you must be mindful of:
They are used as a promotional tool with the idea of increasing the number of car sales and achieve economies of scale.
They are often only available for a limited time and on specific car models only.
Typically, you need a good or excellent credit score to qualify.
They are usually only offered on brand new cars, rarely on used cars.
With the interest rate is 0%, there may be other costs to consider such as the car's price might be inflated to offset the lack of interest. There are often additional fees and charges such as administrative fees and excess mileage charges that can increase the overall costs.
Eligibility Requirements to get 0% Car Finance
The key eligibility requirements for 0% car finance include the following:
A good or excellent credit score is usually needed to be approved for 0% finance deals.
Almost all 0% finance deals require a deposit, though the amount can vary.
The deals are usually only available on specific new car models, not used vehicles.
0% deals are often time limited promotions.
If you have a bad credit score, you are less likely to be approved for 0% finance.
If you are worried about your card being declined, ask from the seller that if they can run a soft credit search to check that are you eligible before applying.
Soft searches (often called 'quotation searches') are only visible to you and will not impact your credit score.
[Image: Car Finance Concept]
Personal Contract Hire - PCH
Personal Contract Hire, commonly known as car leasing, offers you a way to drive a new vehicle without the long-term commitment of ownership.
Whether it's a good option or not, depends on individual circumstance.
Pros and Cons of PCH
Pros
In most cases, PCH provides more affordable monthly costs compared to other financing options. It makes premium vehicles more accessible.
You get to drive the latest models every few years.
PCH leases often include road tax. Cars under three years don't need MOT. It's ideal for those wanting a single, all-inclusive payment without any running costs.
Most leased cars are covered by manufacturer warranties throughout the lease term, potentially lowering your overall cost of ownership.
As you don't own the car, you don't have to worry about the car's future resale value, especially in a fluctuating market.
Cons
You will never own the car, which means you won't be building any equity or have an asset to sell later.
All the lease contracts come with annual mileage limits, typically around 10,000 to 12,000 miles, and have penalties for exceeding them.
You may face additional fees for excessive wear and tear when returning the vehicle, beyond what's considered "fair wear and tear".
You are in less control. Terminating a lease early can be costly, restricting your ability to change vehicles or adapt to new circumstances.
A good credit score is typically necessary to secure favourable lease terms.
The car is never yours. You are limited in making modifications.
When PCH is a Good Option
PCH is a good option for the following:
Prefer driving newer cars and don't consider their car as a asset and aren't concerned about building equity in a vehicle.
Have stable finances and a good credit history.
Drive within average annual mileage limits.
For short term vehicle needs, PCH can be a more viable financial option.
Consider Other Finance Options When?
Wish to build equity in a vehicle or eventually own it outright.
Regularly exceed average annual mileage or have unpredictable mileage needs.
If you plan to keep the vehicle for extended period (5 years)
Want the freedom to modify your vehicle significantly.
Looking for the most cost effective option in the long learn
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