Car finance or a loan: which is best for me?

  • 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

Can't decide whether to go for car finance or a loan? Pick the right one and you could be thousands of pounds better off, reducing the amount of interest you pay or shrinking your monthly payments. Keep reading to find out which works best for you.

Car finance schemes include Personal Contract Purchase (PCP), Personal Contract Hire or leasing (PCH) and Hire Purchase (HP).

Depending upon which you go for, you can choose to run a new car for the contract term and then simply hand it back, make an optional final payment at the end of the contract to purchase it, or simply own the car automatically once you've made all of the monthly payments.

Loans, on the other hand, let you effectively buy a car with cash and you subsequently pay off the balance with a series of monthly instalments.

If you're considering a loan for your next car, take a look at the Parkers car finance tool to find out how much you can afford to borrow. Meanwhile, we've rounded up the best deals available right now, whatever your budget:

PCP finance and PCH leasing differences: what happens at the end of the contract?

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

However, you always have the option of a personal loan, so how do you choose which offers better value for you?  

PCP finance and Hire Purchase often mean low APR plus manufacturer discounts

The best PCP and Hire Purchase schemes feature manufacturer discounts, such as deposit contributions and list price savings. However, the two often differ in terms of interest rate, with PCP proving cheaper in many cases if you plan to buy the car and Hire Purchase saving you money in others.

Expect to pay far higher monthly payments with Hire Purchase, 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, Hire Purchase 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 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 Hire Purchase add the deposit and monthly payments plus any other fees and that'll be how much you pay.

Car finance: better value than a loan when large deposit contributions available

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 their finance deals which can amount to £5,000 or even much more in some cases.

However, remember that if you go for a loan you can take advantage of cash deals, too. 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.

Looking to learn more about car finance? Take a look at the stories below:

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. Visit our Deal Watch page for some of the best value cash deals available now.

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.

Choose a car loan when manufacturer APR charges are high

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.

Certain Citroens, for instance, have come with very high 9.9% APR on the company's 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. 

Pay with a loan to own the car immediately, though being approved for Hire Purchase can be easier

Opt for a loan and you own the car from the start, unlike with PCP and Hire Purchase, 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 Hire Purchase or PCP set-ups.

On the other hand, it can be easier to be accepted for a Hire Purchase scheme than a loan if your credit history isn’t great.

The process of signing up for Hire Purchase 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 vs a loan: which is best for me?

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 take advantage of great cash deals through brokers, however, if you shop around online

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.

Want to find out more about car finance? Click on the links below:

*Deals are correct at time of publication. Everyone’s financial circumstances are different and credit is not always available – Parkers cannot recommend a deal for you specifically. These deals are indicative examples of some packages available this week.