Car finance: a one-stop guide
We've put together a list of the different options you have to when it comes to paying for a new set of wheels
Buying a car can be an expensive business. Unless you have a wad of notes to fling at the car salesman, you’re going to need to borrow some money. Understanding the different approaches you can take to do this will help you make the best, and most affordable, decision for you.
To begin with, we're going to explain the two routes you can take when it comes to financing a car. The first way is 'specialist' car finance plans and the second is 'general' borrowing.
- Specialist car finance plans
The three main plans you can get are: hire purchase, personal contract purchase (PCP) and personal leasing. These plans are offered by a range of lenders (including car dealerships) 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.
- General borrowing - loans and credit cards
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.
Specialist car finance plans
Hire Purchase (HP)
With hire purchase, you usually need to put down a 10% deposit. The rest of the balance and interest can be spread in fixed instalments over one to five years.
Unlike an ordinary personal loan, the money is secured against the car. This means that the car is not yours until you have paid the last instalment. Before that, if you get behind with your repayments, the finance company could take the car away. Consider the interest rate, as it may be more expensive than taking out a personal loan elsewhere.
Suitable 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)
With a PCP, you might also have to raise a 10% deposit – but your monthly payments could be lower than hire purchase for the same car. Why? Because the payments don’t cover the whole cost of the car.
Instead, you pay the difference between the sale price, less the deposit and any trade in, and the price to sell the car back to the dealer at the end of the contract. PCPs typically run for between one and three years. At the end of the contract, you can choose between handing the car back, paying a lump sum to keep the car, or trading the car in and starting again with a different car and new financing.
If you keep the car, you’ll have to fork out extra on top of the money you’ve already paid. The total could then be more expensive than buying the car on hire purchase, with a personal loan or on a credit card. Also, you’ll need to keep the car in good condition, and drive less than agreed mileage limits, or you could get landed with extra charges.
A PCP could be easier to get than a personal loan if your credit record is not squeaky clean. This is because a PCP is secured on the car. If you don’t pay each month, the company can come and take the car away.
Suitable if: you have a deposit, want to keep monthly payments low and like changing your car on a regular basis.
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.
Suitable if: you have enough for the deposit, want to keep monthly payments low and don’t mind that the car is never yours.
General borrowing - loans and credit cards
If you have a decent credit rating, you 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.
Suitable 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.
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.
Access to the highest limits and longest interest-free offers depends on an excellent credit score. If you’d like a sense of the deals available to you, check out the card section of the ClearScore “Offers” page. 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.
Suitable if: you’d like the cheapest option to borrow a limited amount of money, with flexibility about the monthly payments.
You can find out which car finance options are most suited to you on the personalised Offers page of your free ClearScore account.