Best type of car finance

The best type of car finance depends on the car you're buying and what you're after - keep reading to discover the best option for you

BuyaCar team
Sep 20, 2019

Car finance documents are generally stuffed with enough jargon, small print and footnotes to make even the most number-savvy maths graduate dizzy.

But behind the confusing language, it’s surprisingly easy to find the best type of car finance for your situation - if you know what you want.

That’s because the two main types of finance - PCP and Hire Purchase - offer flexible terms that allow you to tailor the agreement to suit your circumstances. You’ll typically be able to adjust the deposit, length of agreement and monthly payments to find the most suitable combination.

Scroll down for a summary of the most popular types of finance and to find out which one best suits your needs. And find out more detail in our guide to car finance.

Types of car finance

Hire Purchase (HP - also known as Conditional Sale)

This type of finance, which is available for new and used models, splits the cost of the car - minus any deposit - into equal monthly instalments. Once you've made the final payment, the car is yours.
More details

Personal Contract Purchase (PCP)

A flexible and affordable form of finance for new or used cars, PCP payments are lower than Hire Purchase because they only cover the value that the vehicle is expected to lose during the contract.

At the end you can choose to return the car or make the optional final payment to buy it. As this often amounts to a third or even half of the initial price, this can also be refinanced, keeping monthly payments low, though you'll end up paying more interest. If the car’s worth more than the optional final payment at the end of the contract, meanwhile - which is known as having equity - you can put the extra value in the car towards the deposit on your next car.
More details

Leasing

Leasing isn’t really car finance - as there's no opportunity to buy the car at the end of the contract, so it's more like long-term car rental - but it does involve paying monthly for a car and is normally only available for brand new vehicles. Monthly payments are relatively low and at the end of the agreement, you hand the car back.
More details

 

Best type of car finance for....

Best type of car finance for low repayments

If low repayments are your top priority, then you can rule out Hire Purchase finance, which involves repaying the full cost of your car, meaning higher monthly payments.

PCP deals come with lower monthly payments because they don’t cover the full cost of the car. This does mean that you won’t own the vehicle at the end of the agreement: if you want to keep it, you’ll need to make the large optional final payment, which can be refinanced. 

You’ll also be able to return the car if you don't want to keep it, though it'll have to be in good condition and within the pre-agreed mileage limit to avoid any further charges.

New car buyers have a further option of leasing the car, which often comes with lower payments than PCP, though it also gives you less flexibility and fewer consumer rights if your circumstances change and you can no longer afford the car, or if the car no longer meets your needs and you need to change it for something else.

 

Best type of car finance for 0% APR interest

It’s normally only new cars that are available with 0% APR interest, which allows you to borrow the money at no additional cost.

Most of these offers require you to take out PCP finance, but several manufacturers also offer 0% APR Hire Purchase deals. Be aware, however that this interest-free credit option often means you miss out on discounts available with other finance deals.

So, shop around before committing to one of these deals; other finance offers, where interest is charged, may come with larger discounts on the list price that more than cancel out the interest charges, meaning that you’ll pay less in total. If in doubt, get like-for-like finance quotes with the same contract length, deposit and mileage allowance to see which provides the lowest monthly payments.

 

Best type of car finance for flexibility

PCP finance comes with a large amount of flexibility, allowing you to keep your options open and to tailor payments to suit your circumstances. From the start, you can normally choose a level of deposit that suits you, along with the length of the agreement, depending on the amount of time that you’re likely to want the car for.

Both factors also have an effect on your monthly payments, so can be adjusted to increase or decrease them, with a larger deposit meaning lower monthly payments and vice versa. Meanwhile, the longer the contract, the lower the instalments normally are.

At the end of the contract, you always have the option of returning the car or buying it for the pre-agreed lump sum - the optional final payment - that can be refinanced.

In some cases, the car may be worth more than the cost of the optional final payment to buy it. If that's the case, you can trade it in and use the difference towards the deposit on another vehicle.

 

Best type of car finance for long-term ownership

Hire Purchase - also referred to as Conditional Sale finance - is designed for buyers who want to own their car at the end of the agreement for the lowest overall cost, which is why the full vehicle cost is divided into equal monthly payments (minus the deposit).

You’ll typically pay less interest than with a PCP agreement of identical length because the monthly payments cover the full cost of the car, meaning that the loan is repaid faster than with PCP, where you still have to make the optional final payment after all the instalments are made to own the car.

 

Best type of car finance for young drivers

If you have no credit history, a bad credit score or simply don't know whether your credit score is good enough for car finance, it can be difficult to be accepted for finance at a low rate - or even at all. That's especially true if your young. In this case, guarantor finance can help.

This involves asking a trusted relative to vouch for you, and to guarantee the finance if you fail to meet the payments. You'll still have to ensure that repayments are affordable, but if your circumstances change and you're no longer able to afford the instalments, your guarantor will be legally responsible for paying on your behalf.

Depending on the car that you choose, PCP and HP finance are available with guarantor finance. Meanwhile, even if you know you have a poor credit score, bad credit car finance deals are available if you set yourself realistic expectations.

 

Best type of car finance for new vehicles

There are plenty of options when buying a new vehicle and the best advice is often to look for the option that offers the best value.

Leasing and PCP finance should provide the lowest monthly payments. If you only want to keep the car for the length of the agreement, then either agreement should suit you.

However, it’s worth being aware of the differences between leasing and PCP, particularly when it comes to ending an agreement early. It’s easier to end a PCP deal early, but may still prove expensive. Beware that ending a lease early, however, could involve additional charges and you may still be liable to pay all of the outstanding monthly payments - even if you return the car.

Otherwise PCP offers the flexibility at the end of the agreement, while HP is best for long-term ownership, with lower overall interest charges, as you're paying off the debt quicker.

 

Best type of car finance for used vehicles

Leasing is not generally available for used cars, so PCP and HP are the most common options. If you want the lowest monthly payments and aren't concerned about owning the vehicle, then PCP is for you.

Meanwhile, if you know that you want to own the car then go for HP as you pay slightly higher monthly payments, but as a result you pay less interest overall, meaning that the total cost to buy a car through HP should be less than with PCP (assuming the same deposit and contract length).

Choosing between them is little different than when you’re buying a new car, apart from the incentives available, which are typically less generous for both types of finance.

 

Best type of car finance for older vehicles

Experts find it difficult to predict the future value of cars that are more than five years old, so PCP finance (which depends on these predictions) is generally not available for older cars, as the monthly payments are affected by what the car is expected to be worth at the end of the contract.

As such, HP finance is most commonly used for these vehicles, as you automatically own the car at the end of the term. Given the lower prices of cars this age, monthly repayments are often relatively affordable.

 

Read more about:

Latest advice

  1. What is the London T-Charge?

  2. Should I buy a pick-up?

  3. Electric car servicing explained

What our customers say