Which type of car finance is best for you?

Getting a car on finance can be a great way to spread the cost of owning your next vehicle.
12 April 2022

By Laura Z

Getting a car on finance can be a great way to spread the cost of owning your next vehicle. Car finance allows you to pay for your chosen vehicle into monthly repayments with added interest. For many people, it means they can get a better car than they would with cash and split it into manageable payments. If you’ve never taken out finance before, you may not be aware of the car finance agreements available to you, and which would be the best option for your circumstances. It’s also worth noting that car finance is never guaranteed, and you may be required to pass a credit check and affordability check before you are accepted for finance. In the UK, there are 3 main types of car finance agreements which tend to be most popular. They are a personal loan option, hire purchase, and personal contract purchase (PCP). Each type of agreement may be more suited to some people over others and may be dependent on your credit score and affordability. Let’s explore the types of car finance available on the market today and how to decide which is best.

Personal contract purchase

PCP car finance deals are a flexible type of hire purchase that allows you to get a car or van on finance. You would borrow an amount from a lender to cover part of the cost of your chosen vehicle. You pay this back in monthly installments over a number of years with added interest. PCP finance can be suited to drivers who want more flexibility from their car finance agreement because you have three options at the end of your agreement. You can choose to either pay the balloon payment and keep the car, hand the car back to the dealer or use the value of the car on a new PCP agreement with another car. With PCP, you can benefit from lower monthly payments and more choices at the end of your deal.

Hire purchase car finance

Hire purchase is a straightforward form of financing. You pay for your chosen vehicle in monthly payments with interest till the end of your term. HP agreements usually last between 1 and 5 years but can be paid back early. Monthly payments tend to be higher than other options but there’s no large balloon payment at the end. Instead, there is an option to purchase fee which allows you to become the owner of the vehicle. Hire purchases can benefit those with lower credit scores as the lender owns the car throughout the agreement. If you fail to make your payments on time, the lender has the right to take the car away from you.

Personal loan

Personal loans can be the cheapest way to finance a car, but they may only be reserved for those with a good credit score. Personal loans can provide low-rate car finance with affordable monthly payments. Personal loans aren’t secured against the vehicle, and they can be used for pretty much anything you want. You would apply for the amount you want to borrow, and it gets deposited into your bank account then you can buy the car you want.

Some drivers may also pay for their car and first year’s insurance as it can be expensive for first-time or young drivers. You will own the car from the start of the agreement, and you can sell the car when you like.

Which is best? You may be suited to one car finance agreement than others. If you want to focus on lower payments and don’t want to own the car, a personal contract purchase deal may be the best for you. If you want to own the car outright and make modifications to your vehicle, a personal loan with good credit can be better than other options. Interest rates are also important when it comes to car financing and being offered a higher interest rate means you’ll pay more back. Your credit score and deposit contribution can affect your car loan approval and also the rate you are offered. Where possible, you should try to increase your credit score and save up for a deposit to help reduce your monthly payments.