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Car finance: a one-stop shop

We've put together a list of the different options you have when it comes to paying for a new set of wheels

03 February 2017Frankie Jones 5 min read
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Buying a car is pretty exciting. However, it also involves lots of choices. Once you've decided what type of car you want, you'll also need to decide how you're going to pay for it.

The cheapest way to buy a car is always cash. This is because you won't be charged any interest. But if like most people you don't have the cash to hand, there are lots of finance options.

Car finance generally falls into two categories: 'specialist' car finance plans and 'general' borrowing.

Want to browse your car finance options? See your offers on ClearScore. You might even be pre-approved.

Specialist car finance plans are credit agreements designed especially for buying cars.

These plans are offered by a range of lenders and might work well for you if you have a less-than-perfect credit score. Even with these finance plans, it’s likely you’ll need a deposit (or a car to part-exchange with). Be aware with some of these plans, you won’t actually own the car yourself – a bonus for anyone who wants to change their car every few years.

Hire Purchase

As the name suggests, hire purchase means you hire the car while you purchase it. You have to pay an upfront deposit of 10%, then you make monthly payments towards the price of the car. Hire purchase deals usually last from one-five years.

After the last payment, you own the car. Before that, if you get behind with your repayments, the finance company could take the car away.

Look carefully at the interest rate of your hire purchase deal, as it may be more expensive than taking out a personal loan to finance your car. Hire purchase rates are usually better for new cars than used cars.

Is hire purchase for you? It could be if you have a deposit, but might not have a high enough credit score to get a cheaper rate on a personal loan. You’d like to own the car at the end of the contract.

Personal Contract Purchase (PCP)

PCPs are the most popular car finance option. Like hire purchase, you pay a deposit of 10%, then make monthly payments. But the payments are lower than a hire purchase deal, because you’re not paying off the full price of the car. If you want to own the car at the end, you have to make a big one-off ‘balloon’ payment.

PCPs typically run for one to three years. At the end of the contract, if you don't want to make the big 'balloon' payment to keep the car, you can hand the car back or trade the car in for a new one. As the credit is secured against the car, if you don't make your payments, your car could be taken away.

PCP is a good option if you want low monthly payments, and aren’t sure whether you want to buy the car or not. It’s also good for people who want to change their car on a regular basis, or drive more high-spec cars than they would normally be able to buy outright. They may also be a good option if your credit record isn't squeaky clean.

However, you have to keep the car in good condition and stick to mileage limits (normally around 10,000 miles a year). They may also work out as more expensive than hire purchase and personal loan if you do want to keep the car at the end.

Is a PCP for you? It could be if you have a deposit, want to keep your monthly payments low and like changing your car on a regular basis.

Personal leasing

The final type of car finance is personal leasing (sometimes called Personal Contract Hire). As the name suggests, this is simply hiring a car for a set amount of time - there’s no option to purchase it like with PCP. At the end of the deal, you return your car or take out a new contract on a different car.

When you lease a car, you pay a fixed monthly cost to use a car, which usually includes servicing and maintenance. You will normally have to pay three months’ rental up front, and may face extra costs if you drive more than the expected mileage.

Essentially, you are just renting the car for an agreed time, and it’s easy to change cars afterwards. The payments may end up even lower than a personal contract purchase.

Is a personal lease for you? It could be if you have enough for the deposit, want to keep monthly payments as low as possible and don’t mind that the car is never yours.

Just because you’re buying a car doesn’t mean you have to take out a specialist car finance plan. It may actually be cheaper for you to take out a personal loan or a credit card, especially if you have a good credit score and can get the best rates. If you can get a loan or credit card to cover the full cost of the vehicle, you may also be able to avoid having to put down a deposit first. This is a good option if you want to buy your car outright.

Personal Loan

If you have a decent credit rating, you can use an unsecured personal loan to borrow the money for a car. You then get to choose how long the loan lasts, so could opt for a longer loan with lower monthly repayments. If you can borrow enough, you might not need any savings as a deposit.

Using a personal loan, the car becomes yours straight away. This does mean that if you can’t keep up the repayments, you can’t just hand the car back and walk away.

Is a personal loan for you?It could be if you have the credit score to get a great rate, but not enough savings for a deposit. You’d like to own your own car from the start.

See your personal loan options: compare loans alongside specialist car finance on ClearScore.

Credit Card

Few of us could stick a Ferrari on a credit card. However, it could be the cheapest option if you choose a less expensive motor.

If you use a card offering 0% on new purchases, and pay off the balance before the deal ends, you can avoid paying any interest at all. Unlike other finance options, you can also vary your monthly payments.

However, if you don’t clear the card before the 0% offer ends, you’re likely to face a much higher interest rate afterwards.

Like a personal loan, you might not need any deposit, and will own the car right from the start. It’s worth checking whether the dealer will accept credit cards – some don’t – and confirming any charges for using a card.

Access to the highest limits and longest interest-free offers depends on an excellent credit score.

Browse your credit card options: see your credit card offers now.

Is a credit card for you? If could be if you’d like the cheapest option to borrow a limited amount of money, with flexibility about the monthly payments.

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Written by Frankie Jones


Frankie takes the often confusing world of finance and makes it clear and simple, to help you get your money sorted.