Buying a car outright is becoming increasingly rare. Around 90% of new cars in the UK are purchased using some form of finance. But with several different types of car finance available, choosing the right one can feel overwhelming. This guide breaks down the main options so you can drive away with confidence, knowing you have made the right financial decision.
Personal Contract Purchase (PCP)
PCP is the most popular form of car finance in the UK. You pay a deposit, then make fixed monthly payments over a typical term of 24–48 months. These payments cover only the depreciation, not the full value of the car. At the end of the term, you have three options: return the car with nothing further to pay, make a final balloon payment to own the car outright, or use any equity as a deposit on a new PCP deal.
Hire Purchase (HP)
HP works more like a traditional loan. You pay a deposit and then make monthly payments that cover the full value of the car, plus interest. Once all payments are made, the car is yours. Monthly payments are higher than PCP because you are paying off the whole amount, but there is no balloon payment at the end and you own the car outright.
Personal Loans
A personal loan from a bank or building society can be used to buy a car outright. This means you own the vehicle from day one and can sell it whenever you wish. Interest rates on personal loans can be very competitive, especially for amounts between £7,500 and £15,000. However, the loan is unsecured against the car, so defaulting could affect your credit rating.
Comparing the True Cost
When comparing finance options, always look at the total amount payable, not just the monthly payment. A longer term with lower payments may look attractive but could cost thousands more in interest. Use the APR (Annual Percentage Rate) to compare like with like. Also factor in any mileage limits (PCP), early settlement fees, and the cost of any required maintenance packages.
Key Takeaways
- PCP offers lower monthly payments but you do not own the car until the final balloon payment.
- HP costs more per month but gives you full ownership at the end of the agreement.
- Personal loans let you own the car from day one and often offer competitive interest rates.
- Always compare the total amount payable, not just the monthly figure.
Frequently Asked Questions
What credit score do I need for car finance?
Each lender has different criteria. Generally, a credit score above 700 gives you access to the best rates, but options exist for lower scores too.
Can I end a car finance agreement early?
Yes. Under the Consumer Credit Act, you have the right to voluntarily terminate a PCP or HP once you have paid 50% of the total amount payable.
Is it better to lease or buy?
Leasing suits those who want a new car every few years without the hassle of selling. Buying (via HP or loan) is better if you want to own the car long-term.
Written by
David Thornton
DipFA, Financial Adviser
This guide has been written and fact-checked by a qualified professional to ensure accuracy. All information is regularly reviewed and updated. Wisehande editorial standards require expert authorship and peer review for every guide we publish.
