Car Finance Options Explained

Buying a car involves many decisions. One of the most important is about how you are going to pay for the car. Knowing your options and which will be best for you before you get to the dealer is a good idea. Here’s the rundown on the main options available to you.

Personal Loan

You can get a personal loan to cover the whole amount of your car. You would get this from a bank or a building society. There will be no deposit. You make fixed monthly payments until you pay back the loan. You will be able to pick a term length to suit you. You will pay interest on the money you borrow.

Advantages of a Personal Loan

  • A personal loan will likely be the cheapest way to borrow money.
  • You will own the car from the start, so you can do what you want with it.

Disadvantages Of A Personal Loan

  • The monthly payments will likely be higher than other finance methods.
  • If you have a poor credit score you might be turned down when you apply.

Hire Purchase

This is an agreement between you and the finance company. You make a deposit and then a series of monthly payments. At the end of the term, you make a final payment. Until you make the final payment you do not own the car, the finance company does.

Advantages of Hire Purchase

  • The car is used to secure the loan so you this may be an option even if you have a low credit score.
  • You can choose not to buy the vehicle at the end of the agreement and instead return it. This can be a good option if the car has depreciated a lot and is no longer worth the amount you have left to pay.
  • If you can pay a large deposit, you might be able to get a 0% interest loan.

Disadvantages of Hire Purchase

  • If you miss a payment, the finance company can repossess the car. If you have paid more than a third of the cost of the vehicle, they will need a court order to do this though.
  • If you change your mind and wish to cancel the agreement you may need to make payments up to half the owed amount before you can get out of the contract.
  • You don’t own the car until you make the final payment. So you can’t sell the car or make any modifications until the end of the agreement.

Personal Contract Purchase (PCP)

This is similar to hire purchase but has a few more restrictions. You still make a deposit followed by monthly payments, and at the end, you have the option to buy the car. When you make your agreement with the finance company you will agree on yearly mileage limits. If you exceed them, you will have to pay an extra fee. You will also have to pay extra for any damage to the car, such as scratches or dents.

The final payment you make will be larger than the other monthly payments. The amount you pay is based on the GFV (Guaranteed Future Value). This is basically the resale value of the car. If you don’t want to keep the car you can use this value towards buying a new car.

Advantages of PCP

  • If the car is worth more than the final balloon payment, then you can use the extra value to get a better deal on your next car.
  • This is a good option if you only plan to keep the car for a couple of years, as you can walk away and return the car once you are halfway through.
  • The monthly repayments are generally quite low.
  • You can often get maintenance costs thrown in.

Disadvantages of PCP

  • The finance company may limit the things you can do in the car. For instance, you may only be allowed to take the car out of the country for seven days and no more.
  • To get out of the deal early, you need to have paid off half of the cost of the car.
  • If the car is not in good condition when you return it you may have to pay extra fees.
  • If you go over the mileage limits, you will have to pay extra fees for every extra mile. The cost per mile can range from 3p to 55p.
  • This can be one of the most expensive forms of car finance.

Personal Contract Hire (PCH)/ Leasing

This is essentially a long term car hire agreement. At no point will you own the car. There is no deposit to pay. You just agree on a yearly mileage limit, the length of the agreement, and your monthly fee. It is basically the same principle as renting a flat. Your payments go towards paying for the use of the car, so you don’t build any equity buy can walk away from the car easily.

At the end of your term, you can return the car. Alternatively, you can renegotiate a new monthly fee and keep the car longer.

Advantages of PCH

  • This is probably the cheapest monthly payment to get behind the wheel of a car.
  • You can lease very expensive cars relatively inexpensively.
  • You don’t have to worry about depreciation as it has no effect on you.
  • Your costs are simple and fixed.
  • If you have a business, you can claim back half the VAT.

Disadvantage of PCH

  • You never own the car, and you never get the option to buy it.
  • Even though you are making monthly payments, you won’t be building any equity, so there is no payout at the end when the car is sold.
  • If you damage the car or exceed the milage agreement, you can be hit with hefty charges.
  • If you have an accident and the car is written off, you will be on the hook for any difference between the value the leasing company has and the value the insurer has.
  • You may have to pay extra to get exactly the car you want.



James Hogg

James Hogg is an author and scottish car fanatic writing exclusively for knowledge library guides. He has a passion for driving fast motorcars and also enjoys riding motorbikes at the weekends and on track days. James is also a contributor and author to the Slainte car finance pages.

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