Car finance options

Baffled by car finance? Let us help you choose the right type of finance and adjust it to suit your needs: here are your car finance options

BuyaCar team
Sep 20, 2019

It’s all very well knowing that you want to finance your car, but working out which type of finance is the best for you can be far more difficult.

As well as various types of car finance available, you’ll normally be able to choose the level of deposit, the length of the agreement and with PCP finance or PCH leasing, your annual mileage allowance, too.

We look at the pros and cons of the major finance options below, so you’ll have a better idea of the type of contract that best suits you.

You can examine the different types of finance in more detail by looking at our guide to your car finance options, or click below for current finance deals.

 

Types of car finance

Personal Contract Purchase (PCP)

This is the most popular type of car finance - and with good reason, as it combines lower monthly payments than a traditional Hire Purchase deal (see below for an explanation of what this is), with the option to buy the car at the end of the contract, something you don't get with a car lease.

PCP offers affordable monthly payments and plenty of flexibility, as you have until the end of the contract to work out what to do next. Once you’ve put down a deposit - which in many cases can be as little as zero - you’ll then make a series of fixed monthly payments.

Rather than covering the full value of the car, these payments only cover the difference in value between the car's initial price and its estimated value at the end of the contract. In other words, your monthly payments only amount to the amount that the car is expected to lose over that period plus a little interest.

So, as you’re not paying for the car in full, monthly payments are cheaper than with other types of finance. This also means that you can simply return the car to the finance company at the end, with nothing more to pay - provided you've stuck to the mileage limit and have kept the car in good condition.

Alternatively, you can buy it by paying the remaining amount - which is referred to as the optional final payment and sometimes known as the 'balloon payment' - or refinancing this if you don't have enough cash to hand.

With PCP it's possible that the car is worth more than the optional final payment at the end of the contract - this is known as having equity. In this situation you’re able to put this extra value towards your next car by 'trading in' your old car and putting the equity towards a deposit on another car - reducing your monthly payments on the next car, along with your future monthly payments.

Alternatively, you can sell the car - with the agreement of the finance company, as they own the car unless you make the optional final payment - and pocket the difference. PCP is available on most new and used cars that are under five years old. More details

Hire Purchase (HP) / Conditional Sale

Hire Purchase finance - also referred to as Conditional Sale - is a straightforward form of finance. Your make a deposit - which as with PCP can be as little as zero in some cases - followed by a series of monthly payments and these add up to the total cost of the car plus a little of interest. As a result, when you've made the last monthly payment, the vehicle is yours, with no large final payment required - unlike PCP.

As your monthly payments cover the whole value of the car, you can expect HP monthly payments to be notably higher than a PCP deal on the same car with matching contract length and deposit. However, as you're paying off the finance balance faster than with PCP, you also pay less interest with Hire Purchase and you don't have to find a substantial chunk of cash - or refinance - at the end of the contract to buy the car outright.

All this means that if you're after the lowest monthly payments and want the choice to be able to buy the car at the end of the contract or walk away, PCP is for you. If, however, you want to cut your interest charges and own the car outright for the lowest cost, Hire Purchase will work better for you.

Hire Purchase is generally available for any new or used car. More details

Bank loan

Borrowing from a bank to pay for a car in cash means that you’ll own the vehicle from day one, so you can modify it or sell it at any point - whether that's after one year or 20 years.

As with Hire Purchase, your monthly payments will cover the full cost of the car, so these are higher than with PCP finance, where much of the cost is deferred into a large final payment that you must make if you want to own the car.

Interest rates on loans can be competitive, but these may not offer the cheapest option because they are not secured - meaning the lender faces a greater risk of not receiving all of their money and interest back and so increases charges to reflect this. Other types of finance are secured on the car itself, which makes it easy for lenders to repossess the car if payments aren’t made, reducing their risk and allowing them to offer low interest rates.

 

Finance options

Deposit
Most finance agreements offer flexibility on the level of deposit that you put down. In many cases, you won’t need to pay a deposit at all, although this does have knock on effects.

The lower the deposit, the larger the amount of money you're borrowing (and need to repay), which increases your monthly payments. You’ll also pay more interest overall because you're borrowing more.

In contrast, the higher the deposit, the less interest you’ll pay, and the lower your repayments. This means that if you want the lowest monthly payments or to cut the amount of interest you pay - and you have the cash to hand - putting down a larger deposit will reduce your bills. This is especially true with dealers that offer particularly high interest rates, with interest charges racking up doubly quickly due to the high rate and large amount of money being borrowed.

 

Length of agreement
Car finance agreements can generally be repaid over a period of between two and four years. Shorter agreements result in higher monthly payments, but you’ll be charged less interest because the money will be repaid faster.

Spreading the cost over a longer period will normally result in reduced monthly repayments but a higher total of interest being paid, as you're paying off the amount you're borrowing more slowly.

 

Mileage restrictions
As PCP finance payments are based upon the difference between the car's price at the start of the contract and its estimated value at the end, lenders need to know how many miles you’ll cover. That's because the more miles a car has covered, the lower its value will be.

It makes sense to calculate your annual mileage limit as accurately as possible as getting it wrong could cost you - whether you state a higher mileage than you cover, or don't travel as far as you though. Estimating a higher mileage than you cover increases your monthly payments, while aiming too low puts you at risk of per-mile penalty fees if you exceed the limit.

Read our guide to car finance mileage allowances to understand how to estimate your mileage accurately and the risks of failing to do so.

 

Options available at the end of car finance agreements

PCP

At the end of a PCP agreement, you can choose to buy the car, by making what's called the optional final payment - also known as the balloon payment. This is calculated when you take out the finance and is an estimate of the car’s value at the end, affected by factors such as the length of the contract and the mileage allowance.

This balloon payment can be paid in one lump sum, or refinanced, allowing you to spread the cost over another series of monthly instalments, though be aware that this also increases the amount of interest you pay on the car. Therefore, if you're sure that you want to own the car, it makes more sense to sign up for a Hire Purchase contract as you'll end up paying less interest overall and own the car automatically once you've made the last monthly payment.

Alternatively, with PCP you can also choose to simply return the car to the lender and pay nothing more. If you choose this, the finance company will come around and inspect the car to ensure there is no excessive damage that goes beyond fair wear and tear, and that you haven’t gone over your agreed mileage limit. Penalty fees will be charged if there is any damage above the expected wear on the vehicle or you've gone over your mileage limit.

Meanwhile, if your car is worth more than the optional final payment - meaning you have equity in the car - there is a third option; it can be 'traded in'. As you don't yet own it, any good car retailer will trade it in for you, by settling the finance, and putting the equity - the value in the car over and above the remaining amount owed - towards another car.

Alternatively, you can sell the car - with the agreement of the lender, since you're not the legal owner - settle the finance and keep the difference.

HP

Once you’ve made the final payment on a Hire Purchase agreement, you’ll own the car. This means you’re free to modify or sell it whenever you like.

Bank loan

As bank loans aren’t linked to the car that you buy, then nothing changes once it has been paid off - apart from the fact that you won't have to make any more monthly payments.

With a loan the ownership of the car and outstanding amount owed are separate, so you'll own it from day one.

   

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