Buying a car on finance

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. Watch the video above for a simple rundown of the three main car finance options available.

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 and can choose to return the car when the contract ends or make the optional final payment to buy it.

Opt for Hire Purchase, however, 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 contribution discounts, no-deposit options or - for some new cars - 0% APR, also known as interest-free credit, 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, though, 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

• Personal Contract Purchase (PCP) 
  PCP is a flexible form of car finance for new and used cars with low, fixed monthly payments. When the 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. More details More details
• Hire Purchase (HP), also known as Conditional Sale 
  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. More details
• Leasing, also known as Personal Contract Hire (PCH) 
  PCH 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 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.

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.

*Only if the car is returned

Personal Contract Purchase (PCP)

Best car finance for low payments and flexibility at the end of the contract

With low monthly payments and flexibility at the end of the agreement, PCP combines the most attractive bits of all the finance options for many drivers. It often attracts the biggest 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 contract, the mileage limit and the deposit to find the most suitable balance of contract terms and affordability. You’ll often have the option of paying no deposit at all, though in turn, this will increase your monthly payments and the amount of interest you have to pay, as you’re borrowing more.

Monthly payments are relatively low because they don't cover the full cost of the car, but the value that it's expected to lose over the length of the contract, with a little interest on top. 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 a PCP, you have the choice to make the optional final payment to buy the car - or refinance this and make another set of monthly payments to take ownership; or simply return 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: 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 on brand-new cars, however it also comes with much less flexibility should your circumstances change and you need to return the car early.

This does vary, though, so if you’re considering both PCP and leasing, it’s worth getting like-for-like quotes with the same deposit, contract length and mileage allowance to see which offers you the best value. And if you have any desire to own the car when the contract ends, or think you might need to end the contract early, it’s best to go with PCP as it is more flexible and returning a car early is typically much easier and should cost less.

Go for PCP and 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 beyond fair wear and tear. This is the same case with leasing, where you must return the car at the end of the contract term.

Hire Purchase (HP)

Best car finance for owning a vehicle when buying on finance

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 larger deposit or choosing a longer deal (though longer contracts mean more to pay in interest, as you’re borrowing money for longer), 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'll be 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, however, so you 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 model, as you are the legal owner of the car. If the car is worth less than expected at the end of an HP contract, and you want to trade it in or sell it, you could get less for it than you anticipated. Unlike PCP and PCH deals where the finance company takes the hit, in this instance, you would lose out. On the other hand, if it's worth more than you'd expected, you can benefit from this by selling it for more than predicted.

Leasing (Personal Contract Hire/PCH)

Best way to access new cars regularly, but never own them

You’re not actually buying a car when you take out a PCH deal. In fact, technically you're not even financing it, since you're not borrowing the money. Instead, you’re hiring a car 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, though PCP can be better value in some cases.

PCH deals are nearly always offered on brand-new cars, and usually require a deposit that’s equivalent to three, six, nine or 12 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.

Monthly payments 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 monthly payments 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 - without the express permission of the finance company - and you’ll need permission to modify it.

With intense competition among lenders, however, you can usually secure a competitive rate of interest with a personal loan - provided you have a strong credit score.

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 potentially miss out on any low-interest offers and deposit contribution discounts that are offered on new and used car finance deals.

Be aware, too, that interest rates have rocketed in 2022, so you can expect to pay much more in interest than in recent years. As a result, it’s worth comparing any personal loans you’re considering with Hire Purchase offers, as these may include similar interest rates plus deposit contribution discounts, which could make them cheaper overall. 

You'll also be paying off the full cost of the car, which will usually make your monthly payments higher than with PCP finance or leasing. And as you own the car from the start, there’s none of the flexibility of a PCP if you want to swap the car part-way through the contract or at the end. If you do find a car you want to change to, however, you can negotiate a value for your existing car with them to establish how much more - or less - you need to pay to get a different car.
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Buying a car on finance: what you 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 figure, which includes other charges, such as arrangement fees.

The APR enables you to get a more realistic impression of how the cost of finance compares between providers, though it doesn't take into account deposit contribution discounts on PCP finance deals. As a result, it’s worth getting like-for-like finance comparisons (with the same contract length and deposit) to see how monthly payments compare.

Also, be aware that car leases don't include APR figures, as you're effectively renting the car rather than borrowing the money with the possibility of buying it at the end.

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. However these typically don't take deposit contribution discounts into account, so it's worth double-checking each deal you're comparing.

The simplest way of doing this to be sure of the real figure is to calculate the total of the deposit, any initial fees, all of monthly payments (multiply the monthly payment by the number of instalments, which should be shown on the paperwork to work this out), plus the optional final payment (in the case of PCP where you want to take ownership of the car when the contract ends) and any compulsory end-of-contract charges.

Leases typically don’t include this figure. Be aware, too that if you plan to return the car at the end of a PCP finance contract - or with a lease - that you may be issued with charges for exceeding the pre-agreed mileage allowance or causing any damage to the car beyond fair wear and tear.

Lease or buy a car? 
If you want to run a car for a couple of years only and then return it, leasing may be best for you: PCH leasing offers low monthly payments, though in some cases PCP finance can prove even more affordable. 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 want to own 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 (assuming the same APR, contract length and matching deposit contribution discounts).

Credit score 
Finance companies use credit scores to calculate the risk of lending to you. High credit 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 access a car - as long as they can show that the payments 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.

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, 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 with PCP. That's not necessarily an error: the most important factor in the cost of PCP 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 typically cost less to lease or PCP 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 you can settle your agreement early. You'll first 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 figure 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 finance balance. Any surplus can either be returned to you or put towards the cost of your next vehicle.

If the outstanding finance balance 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 between the car's current value and what's left to pay is added to the finance for your next car and you make one monthly payment to cover them both. If your new car is notably cheaper than the previous one, then this can still potentially reduce your monthly payments, though typically you'll pay additional interest to do things this way.

Ending a lease is not always as easy. You will almost always have to pay a settlement fee to end the contract. 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, for instance, 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 '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 finance) and don’t have any late payments outstanding. You can also voluntarily terminate the contract earlier 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 to your car, rather than only the other car(s) in the event of a collision, which is the case with third-party insurance, the minimum legal level of car insurance cover.

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 it is 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 having it, then they will cover the cost of a brand-new replacement, which is likely to clear your debt to the finance company.

*Representative PCP finance - Ford Fiesta:

48 monthly payments of £192
Deposit: £0
Mileage limit: 8,000 per year
Optional final payment to buy car: £2,923
Total amount payable to buy car: £11,926
Total cost of credit: £2,426
Amount borrowed: £9,500
APR: 9.9%

BuyaCar is a credit broker, not a lender. Our rates start from 6.9% APR. The rate you are offered will depend on your individual circumstances.