What Is the Best Car Finance for Me?

What are the different car finance options available?

Not everyone has the available cash to pay for a car upfront, which is where car finance comes in.

Car finance is essentially a flexible, accessible way of financing a car. It allows you to borrow a pre-agreed amount of money to purchase a vehicle. This money is paid back in a series of affordable monthly instalments, during which time you have full use of the vehicle.

If you have car finance eligibility, you can apply for a few different car finance options. These include hire purchase (HP), personal contract purchase (PCP), personal contract hire and car loans.

Hire purchase (HP)

With hire purchase car finance, you’ll pay an initial deposit followed by a series of equal monthly repayments. The size of these will depend on your unique car finance deal, as well as the size of your deposit.

At the end of a hire purchase (HP) finance deal, you will own the car outright – no final payment is required. As such, your repayments on hire purchase are likely to be slightly higher than with personal contract purchase (PCP) finance.

Hire purchase (HP) car finance is available for both new and used vehicles.

Personal contract purchase (PCP)

PCP car finance is much like HP. You pay a series of monthly instalments to the lender, the size of which is determined by your initial deposit and contract length.

However, unlike HP finance, you don’t automatically own the vehicle when a PCP deal terminates. This means that your repayments with PCP will be lower than an equivalent HP deal, because you’re technically only paying for the car’s depreciation value.

If you choose to own the vehicle at the end of the car finance deal, you’ll pay one final lump sum (a final balloon payment). This can be equivalent to a third or half of the car’s initial price, so you can refinance the vehicle to pay for this.

Alternatively, if you have positive equity – meaning the car is worth more at your car finance contract’s end than the optional final payment – you can hand the car back, choose another, and put the extra value towards this vehicle’s deposit.

Because you won’t necessarily buy the car outright, PCP car finance often comes with a pre-agreed mileage limit. This protects the minimum future value of the car, as excess mileage can lead to depreciation.

Personal contract hire

This is also known as car leasing, where you pay to use a car for a set period of time. It’s essentially a long-term rental for a fixed period. Similar to PCP car finance, you will be paying to cover the depreciation in a car’s value. However, when your contract ends, there is no option to buy the car. You will always return it to the finance company.

Because it’s car leasing rather than car purchase, you can expect low monthly payments compared to other car finance deals like a hire purchase (HP) agreement.

Personal loan

Another one of your finance options is to get a personal loan to cover the cost of your new car (or used car). Rather than using a finance company, you would apply to a bank or credit union. The advantage of this option is that you can get personal loans to cover more than just your brand new car. That could include paying for your car insurance or just a bit of extra cash for home improvements. However, you’ll typically need a good credit rating.

Which is best for me?

The best car finance for you will depend on a number of factors…

For low monthly payments

Monthly payments are higher with HP because you automatically own the car outright at the end of the finance agreement.

If keeping your monthly repayments low is a priority, PCP is the best car finance for you. However, you may end up paying more overall than with HP finance, depending on the interest rate and length of your finance agreement.

However, if you want to own a car at the end of your agreement, car leasing (personal contract hire) is another option to consider. Your monthly payments will be low because you’re not working towards car ownership, and there’s no final balloon payment or remaining balance to pay off.

For minimal restrictions

PCP finance and lease deals often come with restrictions. These can include everything from mileage restrictions through to paying extra fees if you return the car with excessive wear and tear. Equally, if you want to take your car abroad, you may face limitations with certain lease deals and PCP agreements.

HP finance does not have these kinds of restrictions or limits, so it’s a better option if you think you’ll rack up a high mileage over your finance agreement – or if you often want to drive internationally. You’ll also own the car outright once you’ve reached the end of your finance agreement.

For car ownership

If you’re absolutely sure you want to own your chosen car at the end of the agreement, hire purchase is typically the best option. The full cost of the car will be broken down into your monthly payments so it’s fixed and manageable.

The car will be fully paid for with no balloon payment or settlement figure. However, a personal loan may also provide a simple route to car ownership, depending on your credit history and the annual percentage rate (APR) that you’re offered.

For flexibility

PCP finance agreements might have vehicle usage restrictions. However, PCP deals tend to be more flexible than HP finance.

Both kinds of finance have flexible repayment terms (typically somewhere from 12 to 60 months). However, with PCP, you have more opportunity to determine the length of your agreement. You can also change the size of your deposit.

Remember, the higher the deposit, and longer the contract, the lower these monthly repayments will be. That said, you may end up with higher interest rates compared to HP finance.

Summary

Here’s a brief overview of the types of car finance and what they offer:

• Hire purchase – Fixed monthly payments to pay off the total value and own your car at the end of the agreement.
• Personal contract purchase – Monthly payments cover the cost of a car’s depreciation with a large balloon payment, so you can choose whether you want to own the car at the end of the agreement.
• Personal contract hire – A long-term rental with low monthly payments but no option to own your new car.
• Personal loan – A loan from a bank or credit union to cover the total value of the car, but depends heavily on your financial situation.

Find the best car finance for you with My Car Credit

Navigating the different types of car finance and other finance options can feel overwhelming. My Car Credit is here to make things easier for you. As a car finance broker, we can compare the different finance options on your behalf from a network of trusted lenders.

Whatever your financial situation or credit score, we aim to find a car finance deal that suits your budget and preferences. If you are looking to secure the best car finance for you, try our Car Finance Calculator to begin your car ownership journey.