Car finance makes getting a new set of wheels far more achievable for most drivers. Rather than having to save up for years to get enough cash together, finance enables you to pay for your car with affordable monthly payments.
Not only could this help you to get a better car, but it allows you to budget more easily as well, as you know exactly what you need to pay each month.
Finance can also offer greater flexibility - potentially enabling you to hand the car back without the faff of having to sell it or being able to choose to buy it at the last minute. Go for PCP finance and you get low monthly payments plus you can choose to return the car when the PCP contract ends or make the optional final payment to buy it.
Opt for Hire Purchase and you should pay less interest overall to own the car (assuming the same interest rate and deposit contributions for PCP and Hire Purchase options). Leasing, meanwhile, works like long-term car rental, with low monthly payments, but no option to buy the car - even if you love it. You simply hand it back and start again.
One of the key factors to bear in mind when considering car finance deals is the APR figure - which shows how much extra you have to pay in interest and other compulsory charges - along with the availability of deposit contribution discounts.
Interest rates have risen substantially in 2022, so you can expect to pay more for finance than in previous years. However, you can still often find incentives such as deposit contributions, no deposit offers and - for some new cars - 0% APR, also known as interest-free credit. Bw aware though, you have to balance the value of this with the higher cost of a new car and the consequent need to finance a larger amount.
With so many options, things can get confusing and to get a feel for which car or deal offers you the best value, it’s always good to get like-for-like finance quotes with the same type of finance, contract length, deposit amount and mileage allowance. Keep reading to work out the best finance option for you.
Finance a car: your options compared
If you're looking to buy a car on finance, these are the main three options you'll find available on new and many used cars.
Personal Contract Purchase (PCP)
PCP is a flexible form of car finance for new and used cars with low, fixed monthly payments. When the PCP contract ends, you can return the car, buy it by making the large optional final payment or trade it in for a new car - using any value in the car over the remaining debt (known as equity) towards your next finance deal - making it easy to regularly upgrade. Read our full guide to PCP
Hire Purchase (HP)
This spreads the cost of a new or used car across fixed monthly instalments. 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 - as you're paying off the finance balance quicker. Read our full guide to HP
Leasing (also known as PCH)
Leasing, also known as PCH (personal contract hire) 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. Read our full guide to leasing
An alternative option is to take out a personal loan. This doesn't offer the low monthly payments of leasing or PCP but is more similar to Hire Purchase, enabling you to access a car for a series of fixed monthly payments.
If you can access lower APR figures with a loan than with Hire Purchase, and there are no deposit contribution discounts available with Hire Purchase (which you wouldn’t be able to access by taking out a loan), you’re likely to be better off choosing a loan rather than Hire Purchase.