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

Sep 29, 2019

Purchasing a car on finance has become far more normal for most drivers than paying with cash. But if you’ve not done it before, it can seem baffling.

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.

The most popular type of finance is PCP (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.

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 instalments cheaper than traditional car loans 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 - 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 - costing less in interest overall than an equivalent PCP deal.

The cost of the car is spread over a series of fixed monthly instalments, usually across two to five years. As soon as the final payment is made, you own the vehicle.

Hire Purchase agreements cost you more per month than a PCP deal with the same contract length and deposit - as there's no large payment at the end - but as you're paying off the balance faster, you can expect to pay less overall. Plus, you don't need to find - or refinance - the large lump sum at the end, as you would with PCP.

Another way of paying for a car on a monthly basis is leasing, which is inceasing in popularity. This doesn't count as car finance, as it's effectively like long-term car rental, 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 (Personal Contract Hire), 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.

Scroll down for more detailed pros and cons for each type of 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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