Car finance: which option is right for you?

  • We take a look at the pros and cons of car finance
  • Some offer no deposits and zero percent APR
  • Plus the important small print to watch out for

Car finance is fast becoming the preferred way of getting into a new car these days. Offering fixed monthly payments, access to the latest new cars and technology, plus deals which can include insurance, maintenance and servicing, it’s not difficult to see why it’s growing in popularity.

But with so many different finance methods available, it can be hard work trying to figure out which method is right for you.

Here we take a closer look at the different finance options available, the key pros and cons of each choice, plus important things to consider before you sign on the dotted line.

To find a local deal make sure you check out our cars for sale section and if you’re still trying to whittle down your list of prospective cars, our car reviews section will provide you with everything you need to know about each car.

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.

Hire Purchase (HP)

What is it? Closely resembling a loan you would traditionally get from the bank, you pay monthly instalments and at the end you've repaid the full price of the car and it is legally yours.

Who is it ideal for? People with a large deposit available and who want to take ownership of the car at the end.

The pros:

  • Car is legally yours at the end
  • Fixed monthly payments
  • More flexibility in mileage and condition restrictions

The cons:

  • Higher monthly premiums
  • Depreciation risk
  • Large deposit usually needed

Personal Contract Purchase (PCP)

What is it? You pay monthly premiums and at the end of the term can either pay a balloon repayment to buy the car or hand the keys back. You can lower the price of the monthly payments by laying down a sizeable deposit, although some finance packages offer you the car without paying anything initially.

Who is it ideal for? People who want to keep premiums low and do not want to own the car at the end of the term.

The pros:

  • Lower monthly payments
  • Sometimes no deposit required
  • Many bundles are available which include insurance, maintenance and even fuel

The cons:

  • Balloon payments at the end are large
  • Mileage restrictions

Personal Contract Hire (PCH)

What is it? PCH is a form of leasing, you pay a fixed monthly sum and effectively rent the car for an agreed period of time. Servicing and maintenance are usually included in the cost.

Who is it ideal for? Ideal for those who like to change cars regularly and do not want to be tied into a three- or four-year financial agreement.

The pros:

  • Option to run the car for shorter periods
  • Can change cars more often
  • Fixed costs usually include servicing and maintenance and sometimes insurance too

The cons:

  • Mileage restrictions
  • Will in most cases cost a lot more per month than HP and PCP
  • You never own the car

Zero percent APR

You’ll see more zero percent APR deals for HP finance rather than the other two, but if you’ve got a big deposit to lay down, it’s not uncommon for it to be offered on PCP deals too. Paying no interest offers you a big cost saving over the term of your finance so it's worthwhile shopping around for a low interest rate.

Check out our latest deals in our weekly deal watch here

Low/no deposit deals

The idea of walking into a dealership and driving away in a new car without paying a penny would have been the stuff of dreams ten years ago, but today it’s far from impossible.

Many manufacturers offer such deals, particularly on PCP finance and PCH - beware though, these sort of deals usually carry a higher interest rate and higher monthly payments, so it will end up costing you more over the long term.

Click here to visit our car finance section for a simple, affordable and trusted service allowing you to finance the car you want at the best possible price.

Important things to consider

Some deals look too good to be true and before you sign on the dotted line it’s important to make sure you know all the facts and exceptions – below are some key pointers to be aware of in your finance deal.

  • Mileage restrictions - mileage is one of the main elements which will affect the resale price of the car and is key to calculating your monthly payments - charges if you go over can be significant so it’s important to get it right at the beginning.
  • You are not the legal owner -  when you insure the car you need to make sure that you state the finance company as the legal owner. Until the final payment is made (if you’ve opted for HP) the car belongs to them.
  • Look after your car - the car will be inspected for damage at the end of the contract if you choose to return the keys and anything classed as ‘excessive wear and tear’ may mean you’ll need to foot the bill for repairs.
  • Servicing and Maintenance - many contracts now include servicing and maintenance, but if you’re organising it yourself check the small print as there may be some restrictions on where you can have the work done. Also make sure you get the car serviced on time as stated by the manufacturer.

  • Free insurance - although free insurance sounds great, there can be restrictions, most likely based on age. Also look out for any restrictions on your policy like a courtesy car or free windscreen replacement cover.
  • Are you sure you don’t want to own the car? Even if you’re not considering owning the car at the end of the contract right now, it’s worth saving some money through the term in case you change your mind.

Need more help finding the right car for you? These articles could help…

Car dealers reveal how to save money on your next new car

Top 10 cheap-to-insure hatchbacks

Top 10 new cars for under £200 a month

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What affects the price of your car insurance?