Buying a car on finance

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

BuyaCar team
Jul 31, 2019

Buying a car on finance makes the whole rigmarole of car buying simpler. Rather than having to find a huge cash sum, finance allows you to pay for your car in affordable fixed monthly instalments, helping you to budget more easily.

Using finance adds flexibility too - go for PCP finance and you have the choice to effectively rent the car at an affordable monthly payment for a set amount of time and then have the choice to hand it back at the end of the contract or buy it outright.

Go for Hire Purchase, however, and you cut down on the amount of interest you pay by making slightly larger monthly payments and automatically own the car once you've made all of the instalments.

Leasing, on the other hand, is like long-term car rental, where you have low monthly payments, but no chance to buy the car at the end of the term - even if you love it. You simply hand the car back and start again.

Strong competition keeps interest rates low with car finance deals, there are often incentives such as deposit contributionsno-deposit options or - for some new cars - 0% APR, also known as interest-free credit.

With so many options, though, you’ll want to make sure you’re getting the best deal. 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 whatever your circumstances. For a no-obligation quote, you can apply online or call on 0800 050 2333

 

Buying a car on finance: your options compared

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 of the contract, you can return the car, buy it by making the optional final payment or effectively trade it in for a new finance deal - using any value in the car above the remaining debt to put towards your next finance deal - making it easy to regularly upgrade your car. More details
  • Hire Purchase (HP), also known as Conditional Sale spreads the cost of a new or used car across fixed monthly instalment. Once all payments are made, you automatically own the car. With no large optional final payment deferring some of the cost, monthly payments are higher than with PCP, though as a result you also pay less interest overall. More details
  • Leasing, also known as Personal Contract Hire (PCH) 
    This is like long-term car hire with low, fixed monthly payments. This is normally only available on new cars and you have to return the car at the end of the contract with no option to buy it. More details

An alternative option is to take out a personal loan. This doesn't offer the lower payments of leasing or PCP but is more similar to Hire Purchase.

 

Types of finance

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

No-deposit option

Do you own car?

Mileage charges

Damage charges

PCP

Lower

✔ 

Optional

✔ *

✔ *

HP

Higher

✔ 

✔ 
at end

Leasing

Lower

✔ 

✔ 

Bank loan

Higher

✔ 

✔ 

Savings

n/a

n/a

✔ 

*Only if the car is returned

 

Personal Contract Purchase (PCP)

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

1. Deposit & delivery
  • The larger the deposit, the lower your monthly payments
  • A no-deposit option is often available
2. Monthly payments
  • A fixed payment is due every month for the rest of the agreement
  • You only pay part of the car's cost, 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 more than the remaining debt

With low monthly payments and flexibility the end of the agreement, PCP combines the most attractive bits of all the finance options. It often attracts the most generous discounts, and makes it easy to change your car every few years. As a result this is the most popular type of car finance for new cars and is becoming much more popular on used cars, too.

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, though in turn this will increase the monthly payments.

Payments are relatively low because they don't cover the full list price of the car but the value that it's expected to lose during the agreement. This is the difference between the price at the start and its estimated value at the end, called the optional final payment. This is also known as the guaranteed minimum future value (GMFV) or balloon payment.

At the end of the PCP, you have the choice to make the optional final payment or refinancing to keep the car for another set of monthly payments or simply returning the vehicle with nothing left to pay (provided you've kept the car in good condition and have stuck to the pre-agreed mileage limit). Often, the car is worth more than the optional final payment at the end. This is known as having equity. In this situation, you can trade the car in and put the surplus towards the deposit on your next car, reducing your future monthly payments. Read more

    PCP finance: what’s the catch?

    You may pay a little more for the flexibility of a PCP compared with leasing. In other words, leasing generally offers lower monthly payments, however leasing also comes with much less flexibility. 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. This is the same case with leasing, as you must return the car at the end of the contract term.

     

    Hire Purchase (HP)

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

    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 remainder of the car in fixed monthly instalments

    3. You own the car

    • Once you've made the final payment, the car is yours

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

    You can reduce your monthly payments by putting down a deposit or choosing a longer deal, or you can pay the car off over a shorter 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. That's because you're the legal owner once you've made all the payments. Read more

    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 (this is the same case with PCP as you have to make all of the monthly payments plus the optional final payment before you own the car). At the end of the agreement, there's no guaranteed trade-in value if you want a new car, as you are the legal owner of the car.

     

    Leasing (Personal Contract Hire / PCH)

    1. Initial payment

    • The initial payment is usually the equivalent of 3 to 12 monthly instalments

    2. Monthly payments

    • Fixed monthly payments throughout the agreement

    3. Return the car

    • Once all payments are made, you return the car.

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

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

    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 option to buy the car and if you exceed the agreed mileage limit or return the car damaged, then you will be liable for penalty charges.

    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, though you will own the car from day one.

     

    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 contribution discounts 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.
    Back to top

    Buying a car on finance: need to know

    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? Finance quotes should include the total amount that you pay over the course of the agreement, making it easy to compare deals. However these typically don't take deposit contribution discounts into account, so it's worth double checking each deal you're comparing.

    To be sure of the overall cost for PCP deals, multiply the monthly payment by the number of payments and add the customer deposit plus any initial contract costs. That's how much you'll pay if you hand the car back at the end of the deal - provided it's in good condition and you haven't exceeded the mileage allowance.

    If you plan to buy the car at the end of the contract add the optional final payment to this plus any compulsory charges to purchase the car. Meanwhile, if you're looking at Hire Purchase or a loan, multiply the monthly payment by the number of instalments and add the deposit plus any compulsory charges. Do this and you should be able to see which offer provides you with the best deal.

    Lease or buy a car? 
    If you want a car for a couple of years only, then leasing may be best for you: PCP and PCH leasing offer low monthly payments. At the end you can return the car with nothing more to pay, provided you've stuck to the mileage limit and there's no damage to the car (PCP offers additional options). You can then go straight into another leasing or finance deal if you need to get another car. If you're buying a vehicle for the long term, however, then you'll want to consider Hire Purchase, as this makes you the owner after the final payment for a lower overall cost than PCP finance.

    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. If you're not sure how your credit score stacks up, check out our guide to whether your credit score is good enough for car finance.

         

    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 pay, rather than simply looking at the monthly payments.

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

    Car valueInterest rateHire Purchase agreement lengthMonthly paymentsTotal payable
    £10,0007.9%3 years£312£11,232
    £10,0007.9%5 years£201£12,060

     

    Deposit The larger the 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, however, then you may be able to get a car with no deposit finance.

    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 In some cases, you might see that one car costs less to finance than a cheaper one. That's not necessarily an error: the most important factor in the cost of finance is not the cash price but how much value the car will lose over the agreement: the monthly cost of PCP and leases is based on this figure, so 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.

    Cars available with PCP finance

     

    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 settle your agreement early.

    You'll firstly need to ask your lender for a settlement fee: a one-off amount you'll need to pay to end the contract.

    If your car is worth more than the settlement fee at that time, then you should be able to sell or part-exchange it for another car without too much difficulty. The lender will need to be involved, as they own the car, and most of the money will go straight to them in order to cover the fee. The surplus can either be returned to you or put towards the cost of your next vehicle.

    If the fee is more than the car's value, then you'll need to make up the difference using your own funds. In some cases, negative equity finance can help to spread this cost. The difference is added to the finance for your next car and you make one monthly payment to cover them both. If your new car is cheaper than the previous one, then this can still reduce your monthly payments.

    Ending a lease is not always as easy. You will almost always have to pay a settlement fee. This may amount to all of the remaining monthly payments, meaning that you could be better off keeping the car until the end of the contract rather than handing it back and still having to pay for it.

    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 the instalments because you will have less interest to cover. 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.

       

    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 write off a new car in the first 12 months of owning it, then they will cover the cost of a brand new replacement, which is likely to clear your debt to the finance company.

                          

    Read more about:

    Latest car buying advice

    1. Cash vs finance: how to budget for a car

    2. Cheaper used car tax: road tax rules before April 2017

    3. Second-hand HP (Hire Purchase finance)

    What our customers say