Car Finance Explained - What's the best option for me?

Taking out finance in the form of a loan, or a PCP deal, is one of the most common ways of paying for a new or used car. Few of us have enough cash saved up to pay for a car up front and outright, and so most of us will turn to finance to pay for our cars. With a car being the second most expensive thing you ever buy — after your house — that should come as no surprise.

Just note — taking out any form of finance or loan comes with a certain amount of risk, and you need to make sure that not only can you repay the loan now, but you can continue to repay it in the future. Always read the small print, and don’t take on debt that you cannot sustain. In all of the cases below, if you fail to make repayments, your credit score may be affected, and the car may be taken off you.

Bank or credit union loan

This is probably the simplest form of finance. You simply take out a personal loan and pay for the car up front in cash (usually by bank transfer). You then make monthly repayments to pay back the loan, which will include interest. Unlike a PCP or HP deal, you own the car outright from day one.

• Pros: Simple, fixed repayments, you own the car immediately
• Cons: Interest rates tend to be higher, less flexibility

Hire Purchase (HP)

Hire Purchase is a well-known form of finance. You pay a deposit on a car, the rest is covered by a finance company, and you make repayments on that amount. You don’t own the car until the final payment is made, but it becomes yours outright at the end of the agreement.

• Pros: Easily understood, often has lower interest rates than a bank loan, can be arranged by the dealer
• Cons: Often has higher repayments and interest than a PCP

PCP Finance

PCP (Personal Contract Plan) was created to make new cars more affordable and to encourage loyalty by bringing customers back to the dealer. You pay a deposit and agree on a future value of the car — the Guaranteed Minimum Future Value (GMFV). This amount is set aside for the end, while you pay off the remainder in monthly instalments over 3-4 years.

At the end, you can:

• Pay the final balloon payment and own the car
• Return the car and walk away
• Use the leftover value as a deposit on another PCP deal

While monthly payments are lower than HP, terms and conditions (like mileage limits) apply. Failing to stick to them could cost you more in the long run.

• Pros: Lower monthly repayments, flexible, often 0% interest offers
• Cons: Complicated terms, mileage limits, favours dealer retention

Personal Lease

A personal lease — or personal contract hire — works similarly to company fleet leases, but for individuals. You pay a low deposit (often just one month's rental) and a fixed monthly fee. This can include maintenance, tax, tyres, or even insurance.

Leases suit those who like changing cars frequently. But you never own the car, and early termination can be costly. Like PCPs, leases come with mileage and condition limits.

• Pros: Low deposit, fixed costs, change cars frequently
• Cons: No ownership, potential penalties, restrictive terms