Car finance - the pros and cons

  • Which car finance method suits you best?
  • We detail the pros and cons of each
  • Find out how to cut through the marketing jargon

These days the majority of new cars are sold on finance deals. In fact, it’s becoming unusual for anyone to buy a car outright. Consumers are drawn to transparent deals which boil everything down to a monthly cost, which allows them to budget more easily.

While this sounds like a great idea, it’ll come as no surprise to learn there are countless firms out there trying to make money from unsuspecting car buyers, so it pays to do your research and shop around. You’d read a review of a car you’re trying to buy, so why not find out how to pay for it?

Many companies use marketing speak or even made-up phrases to try and sell their wares, but it all boils down to a set of fundamentals. In this article we take a closer look at the different finance options available and break it down into easily digestible pros and cons to help you pick the right option for you.

Once you've decided on the right type of finance for you, make sure you visit our finance section for a quote - we work with over 21 lenders to give our customers access to over 100 different lending options.

HP (Hire Purchase) – Typically for cars up to 10 years old, HP is a way of buying a car outright. At the end of the agreed period it’s yours. This method usually has a higher rate of interest than personal loans since it's commonly available to people with fair or poor credit history.

It's worth noting that if you want to make any modifications to the car or sell it before the agreed finance period ends, you'll need to square this off with the lender first. 

Pros: Car is yours at end of loan

Cons: Payments are higher

PCP (Personal Contract Purchase) – This one has lower monthly payments, but with the option to pay a balloon payment at the end of the agreed term to take the car, or simply hand the keys back. Sometimes requires a deposit but value of car at the end of the term is guaranteed.

You can make payments lower by increasing the deposit you lay down, but there's also sometimes an option to put nothing at all down in the first instance and drive away in a new car.

Pros: Lower payments, possibility of driving a new car away with no deposit

Cons: Balloon payment usually fairly large

Specialist car finance – There are many companies that will sell you a car finance deal, sometimes regardless of credit rating or whether you have a mortgage, but such factors will affect the amount you pay in interest.

We're tied up with creditplus to provide this service to our readers. To find out what we can offer you, click here.

Pros: Easy to arrange, Loan approval likely

Cons: Can be very expensive

Zero percent finance deals – If you’ve got a bit of cash, this can be a cost-effective way to get a new car. The idea is that you take out finance against the cost of the car and pay no interest, owning the car when the agreed loan period ends. 

Lay down a deposit and spread the rest over a set amount of monthly payments, while paying no interest on the outstanding amount. This sort of deal isn’t as common as other finance packages but deals are there if you shop around. 

Pros: Pay what the car costs, no interest

Cons: Deposit of as much as 40 percent of car’s value required

Don’t forget to check out our Cars for Sale section for the latest deals on new and used cars. And when you come to sell your current car, make sure you get a free car valuation with us to ensure you get the right price.

More articles you may find useful:

Buying new vs used

Family car checklist

When is the best time to buy a car?

Automatic vs manual

Why you should buy a 65-plate car