Car finance explained: The best ways to buy, lease, or borrow for your next car
Financing a car is more popular than ever, but what are your options and which one is right for you?
Finance is one of the most popular ways to buy a new or used car. Whether it’s the ability to split payments into more manageable amounts or the freedom to use savings elsewhere instead of tying them up in one vehicle, finance is something many people consider when purchasing a car.
However, there are several different types of car finance available, each with its own advantages and drawbacks.
Here, we look at the most popular options and what each one offers.
Personal Contract Purchase (PCP) is a popular type of finance available on many cars.
With this agreement, you pay an initial deposit followed by regular monthly instalments.
During the term of your agreement – usually between three and five years – you won’t own the vehicle outright, as the payments cover the car’s depreciation rather than its full value.
At the end of the agreement, you can pay a final ‘balloon’ payment to own the car, exchange it for a new one, or return it and end the finance agreement.
PCP is a good option for drivers who like to change cars regularly, while still keeping the flexibility to buy the vehicle at the end if they wish.
Hire Purchase (HP) is similar to PCP in many ways.
You’ll pay an initial deposit and make fixed monthly payments, but these payments go towards the total cost of the car, not just its depreciation. A
t the end of the agreement, you own the vehicle outright and can drive it payment-free or sell it.
HP agreements usually involve higher monthly payments because you’re paying off the full value of the car, but they’re a solid option for drivers who want long-term ownership.
A personal loan can be a straightforward way to finance a car.
You borrow money from a bank or lender and use it to purchase the vehicle outright, meaning you own the car immediately rather than making payments to a finance company.
You’ll then repay the loan in regular instalments. Missing payments can affect your credit rating and risk repossession of assets.
The amount you can borrow depends on your credit score and financial situation, and you’ll pay interest based on the loan term and rate offered.
A personal loan suits buyers who want full ownership from day one and prefer not to return the car at the end of an agreement.
Leasing works more like renting than traditional finance.
You’ll never own the car, and there’s no option to buy it at the end of the lease period.
However, leasing is ideal for those who like to drive a new car every few years.
Most contracts last two or three years, and monthly payments often include road tax and warranty coverage, offering a convenient, low-maintenance way to stay behind the wheel of something new.
