Best type of car finance

The best type of car finance depends on you and the car that you're buying - find out what works for you

BuyaCar team
Jan 14, 2019

Car finance documents are generally awash with enough jargon, small print and footnotes to turn the brightest eyes bleary.

But behind the formidable language, it’s surprisingly easy to find the best type of car finance for your situation.

That’s thanks to flexible terms that allow you to tailor an 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 short summary of the most popular types of finance, and the best option for common situations. Read more detail in our guide to finance.

Types of car finance

Hire Purchase (HP) or Conditional Sale

The car’s cost (minus any deposit) is divided into equal monthly instalments. Once the final payment is made, the car is yours.
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Personal Contract Purchase (PCP)

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

At the end you can return the car or pay the remainder to buy it (this can be refinanced). If the car’s worth more than the cost of buying it, the difference can be used towards another car.
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Leasing isn’t really car finance, but does involve paying monthly for a car. It’s long-term car rental for brand new vehicles. Monthly payments are relatively low and at the end of the agreement, you hand the car back.
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Best type of car finance for....

Best type of car finance for low repayments

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

PCP deals come with cheaper monthly instalments 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 a large final payment, which can be refinanced. 

You’ll also be able to return the car if you don't want to keep it.

New car buyers have a further option of leasing the car, which often brings cheaper payments than PCP.


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 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.

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, meaning that you’ll pay less in total.


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 and a 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.

At the end, you always have the option of returning the car or buying it for a lump sum that can be refinanced.

In some cases, the car may be worth more than the cost of buying it. You can trade it in and use the difference towards another vehicle.


Best type of car finance for long-term ownership

Hire Purchase or Conditional Sale finance is designed for buyers who want to own their car at the end of the agreement, 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 loan is repaid faster.


Best type of car finance for young drivers

Without a great deal of credit or employment history, it can be difficult for young drivers to be accepted for finance at a low rate - or even at all. In this case, guarantor finance can help.

This involves asking a trusted relative to vouch for you, and to guarantee the finance. You'll still have to ensure that repayments are affordable, but if your circumstances chnage 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.


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 cheapest deal.

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 with PCP, but may still prove expensive).

Otherwise PCP offers the flexibility at the end of the agreement, while HP is best for long-term ownership.


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.

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 such, HP finance is most commonly used for these vehicles. Given the lower prices of cars this age, monthly repayments are often relatively affordable.


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