Car finance: the pros and cons

There are a number of ways you can take out car finance โ€“ find the type that suits you with our guide to vehicle finance pros and cons

Matt Rigby
Mar 5, 2021

Paying for your next car using some form of finance is now much more common than paying for one outright with cash. The vast majority of new car sales are via some form of finance, and itโ€™s becoming an increasingly popular way to pay for a used car, too.

But even though it is a potentially complex subject, with some intimidating-sounding terms, thereโ€™s likely to be a type of car finance out there thatโ€™ll be perfect for you.

The type of finance you decide to go for will depend on your personal circumstances and how you use your car. The key here is to work out whatโ€™s important to you. Are you looking for the lowest overall cost? Are lower monthly payment the most important part? How many miles do you expect to drive every year? Do you want to be the owner of the car you drive, or are you less bothered about technical ownership and just want personal use of a car at an affordable rate?

All these factors should be taken into account when you're looking at how to pay for your next car.

Personal Contract Purchase (PCP)

One of the most popular ways 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 either hand the car back at the end of the contract or to buy it for a pre-agreed amount - known as the optional final payment.

PCP monthly payments only cover part of the carโ€™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 or Hire Purchase (HP), which is covered below.

Contracts typically last between two and five years. 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.

Hire Purchase (HP) and Conditional Sale (CS)

HP (Hire Purchase, and almost interchangeable with Conditional Sale) 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 ยฃ10,000 or more - or refinance this - as you would with PCP.

Leasing a car

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 strictly 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.

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

โœ”

Optional

โœ” *

โœ” *

HP

Higher

โœ”

โœ”

โœ˜

โœ˜

PCH

Lower

โœ˜

โœ˜

โœ”

โœ”

*Where handing car back at end of contract

ย 

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