Buying a car on finance

How to buy your ideal car on finance: the pros and cons of PCP, HP and PCH

BuyaCar team
Jan 23, 2018
iStock/com/GeorgeRudy

Cash is no longer king when it comes to getting a new discount: many of the best deals on new and used cars are only available if you take out finance and spread the cost of a vehicle over a series of monthly payments.

Flexible options make it simple to afford your ideal car if you haven't got the savings; to regularly change your vehicle; or to upgrade to a higher specification. Low interest rates, generous incentives and a no-deposit option in many circumstances, mean that the number of cars bought on finance are surging. Four in five new car buyers now finance their vehicle and the number of used cars being bought on finance is climbing fast too.

If you do decide to take out finance, then you need to ensure that you find the right type for you. Whether it’s a bank loan, a lease deal or an agreement that will end in you owning a car, we’ve got all the details below to ensure that you make the right choice.

BuyaCar works with a panel of lenders to provide competitive quotes for all circumstances. For a no-obligation quote, you can apply online or call on 0800 050 2333

   

Buying a car on finance: your options

There are three popular types of car finance available. See the main differences below and click or scroll down for more detail on each one.

  • Personal Contract Purchase (PCP) 
    Flexible finance for new and used cars with low, fixed monthly payments. At the end, you can return the car, buy it or (in many cases) trade it in for another, making it easy to regularly upgrade. More details
  • Hire Purchase (HP) Spreads the cost of buying a new or used car in a series of fixed monthly payments. At the end of the agreement, you own the car. More details
  • Leasing, also known as Personal Contract Hire (PCH) Long term new car hire, which offers low, fixed monthly payments. You return the car at the end, and can then start a new agreement with another brand new car. More details

Repayments for PCP and leasing are calculated on the particular car that you choose, taking into account factors such as your annual mileage and the speed at which a car loses value. An alternative option is to take out a personal loan. This doesn't offer the lower repayments of leasing or PCP.

    

Buying a car on finance: need to know


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Compare the right interest rate 
There are two interest rates for every finance agreement. The base rate, which is the interest charged on the loan, and the APR interest rate, which includes other charges, such as arrangement fees. The APR enables you to compare the true cost of finance between providers.

Check the total amount payable 
Do you opt for 0% finance on a new car, or a higher interest rate that comes with a bigger discount on the price? There's no need to re-live your Maths GCSE: finance quotes include the total amount that you pay over the course of the agreement, making it easy to compare deals.

Lease or buy a car? 
If you want a car for three or four years only, then leasing may be best for you: PCP and PCH offer low monthly payments. At the endm you can return the car with nothing more to pay (PCP offers other options too). It's then straightforward to get another car. If you're buying a vehicle for the long term, then Hire Purchase makes you the owner after the final payment.

Credit score Finance companies use credit scores to calculate the risk of lending to you. High scores are required to access the lowest interest rates and cheaper monthly payments but finance can still be affordable with a poor credit history. Young driver finance can help 18-21-year-olds to buy a car - as long as they can show that the repayments are affordable. 

      

   

Buying a car on finance: detailed options

Personal Contract Purchase (PCP)

Best finance for low payments and flexibility at the end of the agreement

With low monthly payments and the option to return, buy or (in many cases) trade in the car at the end of the agreement, PCP combines the most attractive bits of all the finance options. It often attracts the most generous discounts too, and makes it easy to change your car every few years.

PCP deals are flexible, so you can adjust the length of the agreement, the mileage limit and the deposit to find an affordable monthly payment. You’ll often have the option of paying no deposit at all.

Monthly payments are relatively low because they don’t cover the full cost of the car. This means that you may be able to afford a better car than if you took out a personal loan or Hire Purchase (HP) finance, but you will be left with a large final payment at the end of the agreement if you want to own the car.

Once your last monthly instalment has been made, you have the following options:

  • Make the final payment (also known as a balloon payment or guaranteed minimum future value - GMFV) and you will own the car.
  • Hand back the keys and walk away with nothing more to pay.
  • Trade the car in for a newer model. If the vehicle is worth more than the balloon payment, then the difference can be used as the deposit for a new finance agreement on another car - from any other manufacturer.

PCP finance: what’s the catch?

You may pay a little more for the flexibility of a PCP compared with leasing, which doesn't offer a range of options at the end of the agreement. However, some of the discounts available for PCP customers can make this option cheaper, so it's worth comparing your options.

Under a PCP, you will be charged a penalty if you return the car and have exceeded the mileage limit agreed at the beginning of the deal, or if the car is damaged.
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More details on PCP finance

 

         

Hire Purchase (HP)

Best finance for Owning a vehicle when buying a car on finance

The idea of HP is simple: the cost of your car is spread over a series of monthly payments. Once you’ve settled the final instalment, the car is yours.

You can reduce your monthly payments by choosing a longer deal, or pay the car off quickly over a short period of time with larger instalments. You’ll often be able to arrange an HP deal without a deposit and there are no mileage limit penalties or charges for damage to worry about if you make all of your payments.

HP finance: what’s the catch?

Monthly payments are higher than with PCP or PCH lease deals because they cover the full cost of the car. You only own the car once all of the finance has been paid off, so can't sell it or modify it without permission until then. At the end of the agreement, there's no guaranteed trade-in value if you want a new car.
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More details on HP finance

    

   

Personal Leasing, also known as Personal Contract Hire (PCH)

Best finance for lowest monthly payments

You’re not strictly buying a car when you take out a PCH deal: you’re hiring it for a period of time and paying a set monthly fee. This usually makes a PCH agreement the cheapest way of driving a brand new car.

PCH deals are mainly offered on new cars, and usually require a deposit that’s equivalent to three-, six- or nine-months’ worth of lease payments. 

Leasing: what’s the catch?

At the end of the deal, you hand the keys back and are left with nothing to show for your payments. There's no guaranteed option to buy the car, If you exceed your mileage limit, or return the car damaged, then you will be liable for penalty charges.
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More details on leasing (PCH)

       

     

Personal loan

Best for owning a car straight away

If you take out an unsecured personal loan, then the car that you buy is yours from day one, which means that you’re free to fit it with a towbar, big exhaust or tinted windows if that’s your wish. You can also sell it at any time.

Other forms of car finance are usually secured on the vehicle. This means that, until they are fully paid off, the car is not yours, so it can’t be sold and you’ll need permission to modify it.

With intense competition among lenders, you can usually secure a competitive rate of interest

Personal loan: what’s the catch?

Unsecured loans may have higher interest rates than car finance and could also affect your ability to take out other credit or loans. Most car sellers save their biggest discounts for customers buying on finance so if you buy this way, you miss out on any low interest offers and deposit contributions that are offered on new and used car finance deals.

You'll also be paying off the full cost of the car, which will usually make your monthly repayments higher than with PCP finance or leasing. And as you own the car, there’s none of the flexibility of a PCP.
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Buying a car on finance: your options compared

These features will apply in most cases, but it's important to compare your options to find the one that suits your needs and offers the best value.

Monthly payments

Deposit required

Do you own car?

Mileage limit

Damage charges

PCP

Lower

No

Optional

Yes*

Yes*

HP

Higher

No

Yes - at end

No

No

PCH

Lower

Yes

No

Yes

Yes

Bank loan

Higher

No

Yes

No

No

Savings

n/a

n/a

Yes

No

No

*Only if the car is returned

    

Getting the best deal when buying a car on finance

Whatever type of finance you take out, it’s worth considering the total amount that you’ll have to repay, rather than simply looking at the monthly repayments.

As the example below shows, you can save hundreds of pounds - even thousands - by opting for a shorter finance period with higher monthly payments, if they are affordable.

Car value Interest rate Hire Purchase agreement length Monthly payments Total payable
£10,000 7.9% 3 years £312 £11,232
£10,000 7.9% 5 years £201 £12,060

 

Deposit The larger deposit you have, the lower your monthly payments will be. You’ll also pay less in interest as you’ll be borrowing less money. If your savings are limited, then you may be able to finance your car with no deposit.

Length of finance term The longer the term, the lower your monthly payments should be. However, the total amount you pay will be higher. This is because you’ll be borrowing money for longer, so you’ll be paying more in interest. It's a similar case if you're leasing with PCH. Longer leases often offer lower monthly payments, but you'll pay more overall because you are renting the car for more time.

Car value It almost goes without saying that the more expensive a car is, the more you’ll pay to finance it. However, most important is how well a car holds its value: the monthly cost of a PCP or PCH agreement is based on an estimate of how much value a vehicle will lose during the lease deal. A car that holds its value well will cost less to lease than one that loses a lot.

Interest rate The better your credit score, the lower your interest rate will be, which helps to keep your monthly payments low.

    

Can I cancel the agreement early if I buy a car on finance?

Yes. If your circumstances change and the PCP or HP payments become unaffordable, or if you need a different type of car, then then you can hand the vehicle back. Towards the end of your agreement, the vehicle may be worth more than the amount outstanding on your finance (this includes the final payment to buy the car with PCP). In this case, you may be able to return the car with nothing more to pay.

If you owe more than the value of the car, then you'll need to make up the difference by paying a settlement fee. In some cases, negative equity finance can help to spread the cost. The settlement fee is added to the finance for another, cheaper car, and you make one monthly payment to cover them both, which should be lower than the finance instalments for the more expensive vehicle.

Ending a PCH is not always as easy. You will almost always have to pay a settlement fee. And in some cases, this may amount to all of the remaining monthly payments.

In some cases, it may be worth refinancing your current car before your agreement is finished, even though you could be liable for extra charges. If you can switch to a deal with a cheaper interest rate, then the lower payments could pay for themselves.

Paying off your PCP or HP finance early will usually work out cheaper than continuing paying in instalments because you will pay less interest. There will usually be a one-off settlement fee that covers some of the interest that the lender misses out on.

If you take out PCP or HP finance, you have the right to end the agreement with a voluntary termination under legislation in the Consumer Credit Act 1974. You can do this without penalty if you’ve already paid more than half the total amount that you owe (including the final payment to buy the car with PCP agreements) and don’t have any late payments outstanding. You can also voluntarily terminate the agreement at an earlier stage but you’ll be charged a lump sum that’ll bring your total payments to half of the total cost of the agreement.

You will still be charged for damage and excess mileage (the limit will be adjusted to reflect the amount of time that you had the car).

   

What happens if I crash a car bought on finance?

Finance companies usually require cars to be covered by fully comprehensive insurance, which would cover repairs.

If the car is written off, then the insurance payout should cover the value of the car at the time. This goes to the finance company, as they are the car’s official owner.

If the payout is less than the amount that you owe, then you’ll still have to make up the difference. You can take out guaranteed asset protection (GAP) insurance to cover this difference.

Many insurers offer new car replacement cover. If you have an accident in the first 12 months of owning a car, then they will cover the cost of a brand new replacement, which is likely to clear your debt to the finance company.

   

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