Car finance: the pros and cons

Not sure which type of car credit to go for? Make an informed decision with these car finance pros and cons

Apr 29, 2020

Purchasing a car on finance has become far more normal for most drivers than paying with cash. In fact more than 90% of new cars bought by consumers are currently financed, along with an increasing proportion of used cars. But if you’ve not done it before, it can seem baffling. Fear not, though, we can help explain the options so you can be sure which option works for you.

Different types of finance are best suited to drivers in different situations. So the key thing is to work out what's most important to you and pick the option that best supports that - whether you want to own your car for the lowest overall cost, are after low monthly payments with the option to buy the car at the end of the contract, or couldn't care less about owning the car you drive and simply want the lowest monthly payments possible.

The most popular way to pay for a car is PCP finance (Personal Contract Purchase). The reason for this is that PCP provides low monthly payments and you have the choice to hand the car back at the end of the contract or you can buy it for a pre-agreed amount - known as the optional final payment.

PCP monthly payments only cover part of the car’s cost - the difference between its price at the start of the contract and what it's expected to be worth at the end. This makes monthly payments cheaper than with a traditional car loan and Hire Purchase, which is covered below.

Contracts typically last between two and five years, and at the end, you can hand the car back with nothing more to pay - provided you've stuck to the pre-agreed mileage limit and there's no damage beyond fair wear and tear - or you can make the large optional final payment to buy the car outright.

HP (Hire Purchase) makes sense for those who know they want to own a car - as you'll end up paying less in interest overall than with an equivalent PCP deal (assuming the same deposit and contract length). The cost of the car is spread over a series of fixed monthly instalments, usually across two to five years. As soon as you've made the last monthly payment, the car is yours.

Hire Purchase agreements cost you more per month than a PCP deal (again assumiung the same contract length and deposit) as there's no large payment at the end. However, as you're paying off the balance faster than with PCP, you'll be charged less in interest overall. Plus, you don't need to find enough cash to cover the large lump sum at the end, which could amount to £10,000 or more - or refinance this - as you would with PCP.

Another way of paying for a car on a monthly basis is Personal Contract Hire (PCH) - also known as car leasing - which is inceasing in popularity. This doesn't count as car finance, as it's effectively like long-term car rental - as you have to hand the car back when the contract ends - though if you're after a new car for a low monthly payment and know you don't want to own it, it could suit your needs.

Also known as PCH leasing is similar to PCP, though you have have no option to buy the car at the end of the contract and you have fewer consumer rights if you need to end the contract early. Look at the table below for the a quick overview of the pros and cons for each type of finance and click to visit our detailed guide to buying a car on finance for all the info on the ins and outs of car finance.

Car finance pros and cons

Monthly payments

Monthly payments

No-deposit option

Do you own car at end of contract?

Excess mileage charges?

Damage charges

PCP

Lower

Optional

*

*

HP

Higher

PCH

Lower

*Where handing car back at end of contract  

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