Car finance or bank loan: which is best for you?

  • Car finance can include discounts and 0% APR
  • Own the car from day one with a personal loan
  • Hire Purchase can be easier to secure

Choosing your next car can be a bit of a minefield. Even after you decide what you want, you've got to figure out how you're going to finance it.

Picking the cheapest option can save thousands of pounds over the course of a typical two to three-year deal. After all, shrinking the interest you pay helps keep those monthly payments down.

The most popular form of car finance is Personal Contract Purchase (PCP). While there is also Hire Purchase (HP) and Personal Contract Hire or leasing (PCH), which is often referred to as leasing.

Leasing is the simplest. Put down an initial payment, stump up your monthly payments, and before you know it it's time to hand the car back.

PCP allows you to run a new car with the option of buying it outright at the end of the agreement. HP means you're locked into buying the car outright. While a personal loan allows you to buy the car outright from the seller.

Car loan or car finance

Personal loans

Loans let you effectively buy a car with cash. You subsequently pay off the balance with a series of monthly instalments. 

Opt for a loan and you own the car from the start, unlike with PCP and HP, where the car doesn’t become yours until you’ve paid off the entire balance. Another benefit comes in the form of not having to pay a large upfront payment, as you do with many HP or PCP set-ups.

As personal loans are sourced separately to the car, these can prove costly compared with manufacturer finance deals if you simply pay the list price of the car.

That's because manufacturers often offer deposit contribution discounts in conjunction with finance deals. These can be more than £10,000 on premium models that aren't selling well.

However, if you go for a loan you can take advantage of cash deals. As you're not tied to a dealership in this case, you can exploit the biggest cash discounts – whether they're in the dealership or online – which could include similarly large, if not larger savings.

If the savings are similar whether you go for finance or a loan, then compare the APR charges. The lower the APR, the less interest you'll pay. 

To be sure whether PCP, HP or a loan is best value, compare the total amount payable for the finance schemes with the overall total of all the loan payments if you bought the same car with cash.

Car loans can prove much better value than manufacturer offerings, however, if you plan to buy a car and the manufacturer charges high interest rates and offers small, if any, deposit contributions.

Personal loans pros

> Don't need to pay a deposit
> No restrictions on how you drive the car
> You will own it outright from the start so can sell or change your car whenever you see fit

Personal loans cons

> Likely to be refused if you have a poor credit rating
> Interest rates often higher than manufacturer-backed deals
> More complicated than getting manufacturer-backed finance

Further reading:

>> No deposit car finance offers
>> The best hybrid cars to lease
>> The best electric cars to lease
>> Lease or buy: rent or keep?
>> How to find cheap car finance
>> Car payment holiday advice

Car finance

One of the major factors that differentiates car finance schemes is whether they let you buy the car at the end. PCH leasing schemes don’t give you the option to buy the car – drivers run the car for the contract term and then hand it back.

>> Search for car leasing deals

Car finance v a loan

HP is geared up so that once you’ve finished your monthly payments, the car is yours. In contrast, PCP gives you until the end of the contract to decide whether you want to purchase the car. If you do want to own it, you can make the optional final payment to buy it. If you want to move to a new car, however, you can hand it back with nothing left to pay (provided you've stuck to the contracted mileage limit and the car's in good condition when you return it).

The best PCP and HP schemes feature manufacturer discounts, such as deposit contributions and list price savings.

Expect to pay far higher monthly payments with HP, as you own the car automatically once you've made all payments compared with PCP where you have to pay the substantial optional final payment in addition to monthly payments to take ownership.

If you’re sure you want to keep the car once your finance term comes to an end, though, HP is the more cost effective option, provided both deals feature the same deposit contribution discounts and APR charge. That's because the higher monthly payments mean you pay off the balance quicker, so interest charges mount up more slowly. 

If you're struggling to decide between the two, it's worth narrowing down your options to a few cars and then getting quotes for both to see how much difference there is in the total amount payable by the customer to buy the car.

To work out this figure for PCP schemes add the deposit, total cost of all the monthly payments and optional final payment together plus any set-up or purchase fees. In the case of HP add the deposit and monthly payments plus any other fees and that'll be how much you pay.

2020 Renault Clio hybrid rear

Some car manufacturers offer upwards of 9.9% APR on PCP plans, meaning you could pay thousands in interest alone, depending on the value of the car.

Though some of these models come with deposit contribution discounts you could still be much better off going for a low-APR loan, which could charge around a third of the interest, if you want to own the car when the contract ends. 

The process of signing up for HP can also be simpler, as you can do this in the dealership before driving off in your new car – and rates on cars over £25,000 are often lower than you could get with a personal loan.

Car finance pros

> Easier to get if you have a low credit score
> Typically lower monthly repayments
> 0% APR regularly offered

Car finance cons

> Deposit required
> Car owned by finance company until you make final payment
> Mileage/modification limitations

Car finance vs a loan: which is best for you?

While loans let you borrow money for multiple purposes – and give you the opportunity to own your car from day one – choosing one to finance your car means you can miss out on a number of great-value manufacturer offers. You can however take advantage of great cash deals through a car dealer or a broker.

PCP, meanwhile, lets you hand the car back at the end of the contract, if you decide you don’t want to keep it, whereas you'd have to actively sell or part exchange the car if you went for a loan.

If, however, the manufacturer charges a high rate of interest and doesn’t offer large finance incentives, you could be quids in by choosing to get a loan rather than going for one of the car company’s offerings. Tot up the total cost of both options – accounting for any set-up charges or car company discounts – and you should be able to see which option will cost you less.

What to read next - car finance 

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