A Guide to Car Finance

Car Finance Explained 

When you’re buying a new car there are several finance options available to you that can usually be arranged through the car dealer you are buying from. This guide gives you an overview of the different types of finance available and the features of each. 

Hire Purchase (HP) 

Hire purchase is a type of secured loan that is secured against the car you are buying, normally arranged by the car dealer. You pay an initial deposit (usually around 10%), then make fixed payments each month according to the term you agree with the lender, which can be anything between 12 and 60 months.  

Pros of HP: 

• Interest rates for HP agreements are usually competitive 
• Can often be arranged even if you’re not eligible for a personal loan 
• Usually a fast and convenient way of arranging your finance with the dealer  
• You own the vehicle at the end of the term 

Cons of HP: 

• HP agreements are usually subject to administration charges 
• Some lenders require these charges to be paid up front (while others will add it to the value of the loan)   
• The car isn’t 100% yours until you make the last payment  

Personal Contract Purchase (PCP) 

As with an HP agreement, with PCP your finance is usually arranged with the dealer you are purchasing the vehicle from. You pay an initial deposit of around 10%, but rather than taking out a loan for the full cost of the car, your monthly payments cover the amount of depreciation based on an agreed annual mileage. At the end of the term, which is usually between 12 and 48 months, you have several options: 

– Trade the car in and start again with another vehicle 

– Give the car back to the dealer, with nothing more to pay 

– Make a final ‘balloon’ payment (which is agreed at the start of your contract) and keep it 

Pros of PCP: 

• Monthly repayments are often lower than an HP deal 

• Usually a fast and convenient way of arranging your finance with the dealer  
• You could choose to have a new car every few years 

Cons of PCP: 

• You never own the vehicle, unless you pay the ‘balloon’ at the end of the term 
• You may be subject to extra charges if you return the vehicle and it is deemed to have excessive wear and tear 

• The total amount you pay may be slightly more than with an HP deal 

Leasing/Personal Contract Hire (PCH) 

With a lease or PCH deal, you pay the car dealer a fixed monthly amount for the use of a vehicle over an agreed term between 12 and 36 months. The deals are often offered with servicing and maintenance included. You agree not to exceed a specified mileage limit and you usually have to pay a deposit of three months’ rental. 

When the agreement comes to an end, you hand the car back to the dealer. It never belongs to you.  

Pros of leasing/PCH: 

• A good option if you like the idea of all services and maintenance being covered 
• You won’t have to worry about the vehicle depreciating in value 
• You can choose a short-term option and change your car after as little as 12 months 

Cons of leasing/PCH: 

• Higher initial deposit than HP or PCP 
• Monthly payments are subject to VAT 
• Early termination of the contract can be costly  
• Excess mileage or damages may be chargeable at the end of the term 

What’s the Best Option for Me? 

It really depends on your individual criteria. If you like the idea of eventually owning the car but spreading the cost, then an HP or PCP deal could work for you. Ask for quotes for both options and look at the total overall cost of each, including all charges and fees. 

If you prefer the idea of having the flexibility to change your car regularly and having the option to include service and maintenance, then leasing could be a good option. As with any financial decision, do your research, shop around and weigh up all your options before coming to a final decision.