Video: What is car finance?

Want low monthly payments, but not sure which type of finance is right for you? Here we explain PCP finance, Hire Purchase and PCH leasing

BuyaCar team
Apr 9, 2020

Don't have the savings to pay for your next vehicle in cash? Car finance gives you the option of spreading the cost across a series of monthly payments, so that you can get the car you want for a cost you can afford. Check out the three most common options - PCP finance, Hire Purchase and PCH leasing - in the video above, to work out which one suits you best.

Opting for finance can help you to get behind the wheel of a more desirable car that otherwise would have been out of budget or mean that you're able to upgrade to a more recent model. Many drivers choose to do this to get a more economical, safer or better equipped car.

With more than nine in 10 new cars in the UK being financed - along with an increasing number of used cars - there are now more finance options than ever. Be aware, though, that in most cases you can expect to pay a premium for taking finance over paying cash, with a little interest added to your monthly payments.


What is car finance?

'Car finance' is used to refer to any option where rather than paying for a car in a lump sum, you pay for it in instalments. The motivation for this is for drivers to get the keys to a better car than they could otherwise afford. You may not have £10,000 to purchase a three-year old Mini outright, for instance, but you may be able to stretch to £1,000 cash and £150 per month - more than enough to finance a £10,000 Mini on PCP, the most common type of finance.

In this example, choosing finance could mean the difference between buying a 15-year old £1,000 Mini with cash and financing a more reliable and safer three-year old model, which is likely to cost less to run. With finance, you effectively borrow the money needed and repay in monthly instalments, plus a little interest.

Some types of finance are set up to provide the lowest possible monthly payments, while others prioritise offering the lowest overall cost to buy the car through a series of monthly payments. The type of finance that's best for you will depend on the car you choose, how long you plan to keep it, whether you want to own it plus the amount of cash you have for a deposit and the monthly payments that you can afford.

In most cases you can adjust the length of the contract, the deposit amount and the mileage allowance with finance. All of these have an impact on the monthly payment; typically the longer the contract is, the lower your monthly payments, while larger deposits result in lower monthly payments and higher mileage allowances bump up the instalments needed.  

Car finance with bad credit

Hire Purchase (HP)  splits the cost of the car into an initial deposit and a series of equal monthly payments - once these are made, you own the car. While, PCP finance also consists of a deposit and monthly payments, the monthly payments are lower than with Hire Purchase (assuming the same contract length and deposit), but you don't automatically own the car at the end of the contract. If you want to own the car you must make the large optional final payment to take ownership. If not, you can choose to return the car with nothing else to pay (assuming you've stuck to the pre-agreed mileage limit and there is no damage to the car beyond fair wear and tear).

Most finance agreements charge interest and fees, which are added on to your repayments. These are set out as an APR interest rate. The higher the rate, the greater the interest charges are. Be aware, however, that if 'deposit contributions' are available these are finance discounts that aren't taken into account in the published APR figure.

A large deposit contribution discount could more than outweigh all of the interest charged, so you need to consider the APR figure alongside any deposit contributions available to gauge which option offers you the best value. As always, if you're comparing finance quotes get like-for-like quotes (the same type of finance, deposit amount, contract length and mileage allowance) to see which offers you the lowest monthly payment and overall cost.

Which cars are available with finance?

Virtually any car can be purchased with finance, from a little Fiat 500 to a Rolls-Royce Phantom (although you're likely to need to find a specialist provider if you're looking at a £400,000 Rolls-Royce).

All 60119 cars currently for sale on BuyaCar are available with finance. Cars under five years old are generally available with PCP finance, which brings lower repayments and a range of options at the end.

All can also be bought with Hire Purchase finance, so you'll own the car once the last payment has been made.

The cost of finance will depend on the interest rate that you're charged. Based on representative examples, which use an interest rate available to the majority of customers and assume a ten per cent deposit, there are 173 cars for under £100 on BuyaCar. With an increased budget of £200 per month, your choice increases to 20053 cars.



Types of car finance

What is Personal Contract Purchase (PCP)?

Available for new and used cars, PCP is the most popular type of car finance because of its low monthly payments and flexibility - you can choose to hand the car back or buy it outright and the end of the contract.

Instead of repaying the full cost of the car through the monthly payments, the instalments only cover the value it's expected to lose during the course of the contract. This is the difference between the value of the car at the start and the amount that it's expected to be worth at the end - as calculated by the finance company.

This means that you won't automatically own your car at the end - as you don't pay the full cost of the car over the contract - but you can choose to do so by making the optional final payment (which is set at the start of the contract) at the end.

1. Deposit & delivery
  • The larger the deposit, the lower your monthly payments
  • No-deposit options are often available
2. Monthly payments
  • A fixed payment is due every month for the length of the contract
  • You only repay part of the car's cost over the contract, keeping payments low
3. Buy / return / upgrade
  • Pay the remaining balance or refinance to keep the car
  • OR Return the car and owe nothing
  • OR Trade-in for another vehicle if the car is worth enough


What is Hire Purchase (HP)?

Hire Purchase finance is simpler than PCP. The cost of the car (plus any interest and fees) is split into an initial deposit (in many cases this can be as little as £0) and a series of equal monthly payments. Once you've made the last monthly payment the car is yours to keep. Hire Purchase is available for new and used cars, and is sometimes referred to as Conditional Sale.

1. Deposit & delivery

  • The larger the deposit, the lower the monthly payments. A no-deposit option may be available

2. Monthly payments

  • Pay for the rest of the car with fixed monthly payments

3. You own the car

  • Once the final payment is made, the car is yours.


What is PCH Leasing?

Technically leasing isn't a type of car finance because you don't borrow any money. It's much more like long-term car rental, as you pay a monthly fee for the car and hand it back at the end of the contract. It works in a similar way to car finance, though because you rent the car with a series of fixed monthly instalments and then return it at the end. Leasing is typically only available for new cars.

1. Initial payment

  • Initial payment is usually the equivalent of 3 to 12 monthly payments

2. Monthly payments

  • Fixed monthly payments throughout the agreement

3. Return the car

  • Once all payments are made, you return the car


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