Best type of car finance

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

BuyaCar team
Jul 31, 2020

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, meaning that they could work for many drivers. You’ll typically be able to adjust the deposit, length of agreement and consequently affect how much the monthly payments are to find the most suitable combination.

PCP suits those who want the lowest monthly payments with the option to buy the car at the end of the contract - for a substantial lump sum, the optional final payment - while Hire Purchase suits those who want to own the car for the lowest overall cost, with no big final payment needed.

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 and out video explainer below.

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. Unlike PCP there's no supersized final payment needed. Just make all of the monthly payments and after the last one, you automatically own the car.

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Personal Contract Purchase (PCP)

A flexible and affordable form of finance for new or used cars, PCP payments are lower than an equivalent Hire Purchase deal (assuming the deposit and contract length are the same) because they only cover the value that the vehicle is expected to lose during the contract (rather than the car's full cost).

At the end you can choose to return the car with nothing else to pay (assuming you haven't exceeded the pre-agreed mileage limit and there is no damage to the car beyond fair wear and tear) or make the pre-agreed optional final payment to buy it.

As the optional final payment 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 you do this. 

If the car’s worth more than the optional final payment at the end of the contract, meanwhile - which is known as having equity - and you want to hand the car back and get another one, you can put the extra value in the car towards the deposit on your next car.

Do this and the equity reduces your monthly payments on your next car. The more equity you have, the lower the monthly payments on your next car will be. Just remember that negative equity is the opposite and means that even if you were to give the car back, you'd still have to pay extra to settle the debt.

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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. Leasing is normally only available for brand new vehicles.

Monthly payments are relatively low compared with the value of the car and at the end of the agreement, you have to hand the car back. Since the car is never yours and there's no option to buy it, remember that you'll have to stick to a strict mileage limit and keep the car in good condition to avoid any end-of-contract charges.

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Best type of car finance for....

Best type of car finance for low monthly payments

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 at this stage 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 drivers 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 you need to return the car early.

Bear in mind that if your circumstances change during the contract 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, that you may still be liable to pay all the monthly payments with leasing - potentially even if you were to hand the car back. If you want added flexibility, therefore, PCP could be a good option, with similarly low monthly payments and the option to return the car, buy it or potentially swap it early for another one.

 

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. Remember that buying a new car is typically the most expensive way to purchase a car - as the cash price for the car is so much higher - so while you may pay no interest, this is still normally not a cheap way to purchase a car.

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 it may not be as good value as it appears.

So, shop around before committing to one of these deals; other finance offers, where interest is charged, may come with large discounts on the list price that more than cancel out the interest charges, meaning that you’ll pay less in total. Alternatively going for a nearly-new car that may have a list price many thousands of pounds less could come with far lower monthly payments, even if interest is charged.

As a result, it's always worth getting like-for-like finance quotes with the same contract length, deposit and mileage allowance to see exactly which option 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 payments 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 Hire Purchase 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 you're young. In this case, guarantor finance can help.

This involves asking a trusted friend or 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 purchasing 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 could suit you, though you'll have nothing to show for your monthly payments at the end of the contract.

It’s also 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 Hire Purchase is best for long-term ownership; you pay higher monthly payments than with PCP, though overall interest charges are lower, 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 Hire Purchase 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. Be aware that with older cars - typically those over six years old - PCP may not be available.

If that's the case you'll have to go for Hire Purchase. Do this and you'll automatically own the car at the end of the contract, so you can keep it, sell it or trade it in at this stage, depending whether you want to change your car again.

 

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, Hire Purchase is most commonly used for these vehicles, as you automatically own the car at the end of the term, so the finance company doesn't need to worry about what the value of the car will be, as they'll no longer own it once the contract finishes. Given the lower prices of cars this age, monthly payments are often relatively affordable when using Hire Purchase.

 

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