With cars becoming more expensive than ever, it’s no surprise that finance has steadily grown to become the most popular way to get a new car.
But with a number of options to choose from, working out the best way to finance a car can feel overwhelming. It might take time to understand how they all work, but it’s worth it to make sure you get the right type of finance.
Here, we take a look at all of the finance options, and run through why they may (or may not) be the best way for you to finance your car.
What is car finance?
We know it can be confusing when you haven’t used finance before, and you’re trying to distinguish between PCP and PCH.
But if it’s your first time looking at finance for your car, there’s no need to stress. Getting your new car should be exciting, so we’re here to help you through the process of financing your car. We’ve got a full guide explaining what car finance is, so if you’re still navigating the ins and outs, we’d recommend starting there.
On the whole, finance is actually really simple. Each type varies in terms of how and what you pay, and what happens at the end of the term, but the essence of how it works is generally the same. You choose your car, apply to the finance company, bank or lender, and have the cost of your car spread across monthly payments over a term of around 3 to 4 years.
What are the main finance options?
With car finance you have four main options to choose from: Personal Contract Purchase, Hire Purchase, Car Leasing, or a Personal Loan.
Each type has its own advantages, so we’ll give you a brief overview of how they work, then look at why each could be the best way to finance for you.
Personal Contract Purchase
See “what is PCP finance”.
Personal Contract Purchase (PCP) typically takes the top spot for most popular finance. You get the best of both worlds, with the option to either keep or return your car at the end of the term.
All you have to do is:
- Choose the car you want.
- Agree a term with your lender.
- Pay your monthly instalments.
- Make the optional balloon payment if you want to own at the end of the agreement.
PCP finance means that rather than the total cost of the car, your monthly payments are covering the cost of the car’s depreciation. As a result, you generally have lower monthly payments than HP.
PCP could be right for you if you want:
- Total flexibility on whether to keep or return the car. Drive your car for around three years, and if you want to keep it at the end of the term, just pay the lump sum. Otherwise, return it to the finance company or dealership.
- Incentives such as deposit contributions. Finance deals like PCP mean you could be taking out another deal in a couple of years, so it’s often easier to negotiate and get deals from dealerships.
PCP probably isn’t right for you if:
- You already know you want to own the car - as options like HP will work out cheaper.
- You regularly have a very high annual mileage - HP and personal loans are better for high mileage drivers as there’s no restrictions.
PCP is best for its flexibility - you can choose to keep or return the car, and it’s less complicated than other methods if you decide you want to end your PCP deal early.
See “what is car hire purchase”.
Car Hire Purchase is similar to PCP in that you don’t own the car until the end of the contract, however with HP, your payments contribute towards owning the car.
You are still hiring the car over the duration of the contract, but as your payments make up the total cost of the car, it’s yours at the end of the term. HP is often the best way to buy a car on a payment plan, and you can even get a used car from some dealerships.
Hire Purchase could be the best way to finance your car if:
- You know that you want to own the car, but can’t afford the upfront cost of paying it all off at once.
- You want to spread the payments out for longer - HP offers longer terms than PCP, with deals going up to 5 years. Just bear in mind that longer repayment plans will cost more overall due to interest.
- You don’t want restrictions - Unlike PCP or leasing, dealerships don’t usually enforce mileage limits on HP, so you can drive as often and as far as you like. You also don’t have to adhere to “fair wear and tear” guidelines as you’re not handing the car back.
HP won’t be for you if:
- You like to get a new car regularly - For frequent upgrades it’s more cost effective (and less hassle) to go for PCP or leasing.
HP is best for those who want to own their car eventually but don't have the cash to pay upfront.
See “how does car leasing work?”
Though one is for personal use, and the other for business, they essentially follow the same process. You pick out a car you want to lease, and pay a leasing company monthly for around 2-4 years in order to hire the car. The cost is made up from the depreciation over the length of your contract, so it often works out to have the cheapest monthly payments, plus you’re covered for road tax and warranty.
At the end of your lease term, there’s no final payment or cost, and all you have to do is return the car in good condition (according to fair wear and tear guidelines) and within the agreed mileage allowance.
Leasing is a great finance option if:
- You always have your eye on the latest models - Most lease deals only run for 2 to 4 years, so you can easily return your car at the end of the contract hassle free and move on to the latest tech or upgrade.
- You want an expensive car on a budget - Leasing means you cover the cost of the depreciation of your car over the length of the term, so it’s a more affordable means of getting an expensive car for less.
However, leasing may not work for you if:
- You want to own the car - Leasing doesn’t offer the option to purchase at the end of the contract.
Leasing is best for its low monthly payments - You can choose to keep or return, and it’s less complicated to end a PCP deal early.
See “how to get a car loan”.
A personal car loan really isn’t any different to any other type of loan. You borrow the money from the bank in order to pay for your car, then have monthly repayments to pay them back.
After you’ve decided on your car, apply to your bank or finance provider with the required amount. It can be trickier to get approved for personal loans if your credit rating and history are on the poor side, but some lenders may approve bad credit ratings, with the caveat of a higher interest rate.
Once you get approved, the money goes directly into your bank account. You can purchase the car whenever you like, and as the immediate owner, you have no restrictions on what to do with it.
A personal loan could be right for you if:
- You need a long repayment term - Personal loans offer the longest terms to pay back your car loan, with up to 7 years.
Personal loans may not work for you if:
- You don’t want to deal with owning and selling the car - Once you’ve paid for it, the car is entirely your responsibility. If you decide you don’t want it anymore, you’ll have to do the dirty work trying to sell it on.
- You have a poor credit rating - good credit scores will get the lowest rates on loans, whilst those with bad credit history will pay higher. It’s always best to do a credit check yourself through sites like Experian and ClearScore before applying.
Personal loans are best for owning outright - You get all the benefits of spread out payments, and own the car straight away.
Whichever finance method you want to go for, it’s always best to do your research first. If your budget is the main concern, think through how much you should spend on a car. When finance spreads out the cost it can be tempting to go for the flashier models, but on top of the cost of the car, you have the car running costs and fees for any maintenance to consider.
We’ve got a post dedicated to helping you decide whether you should get a car on finance, and a whole bunch of comparison posts to guide you on choosing between them like:
- PCP vs Bank Loan
- Lease vs Finance
- PCP vs HP
- PCP or Buying Outright
- PCP vs Lease
- PCP vs HP vs loan
- PCP vs HP vs lease
- Hire Purchase vs Lease
- Lease Purchase vs Hire Purchase
- Lease Purchase vs PCP
- Lease vs Lease Purchase
Alternatively, you may prefer to buy your car outright. Though there’s not the same stipulations and terms as there are with finance, there’s still a lot to factor into your decision. Did you know that there are even best times to buy a car? You can pay for the car with cash upfront or buy a car on a credit card.
If you are keen on leasing, then Lease Fetcher are here to help you compare car lease deals from leading UK brokers. Whether it's personal car leasing or business car leasing you're after, we've got you covered!