Most Brits have heard of car finance but what many people don’t understand is that not all deals are created equal. There are loads of options out there, not just in terms of lenders but also the different types of car finance available. Whether you’re shopping for a brand-new model or a used car, knowledge is everything when it comes to choosing the best type of car finance.

That’s why we’ve put together this guide designed to help make smart and informed decisions. Read on to find out more about the different options available in the UK and how to select the best type of car finance for your needs.

Hire purchase (HP)

Hire purchase loans are often offered by dealers and are designed to get you behind the wheel of your new car ASAP. The loan is secured against the car, which means you don’t own the vehicle outright until you’ve made your final payment and cleared all outstanding debts. HP loans can start with a deposit, usually at least 10% of the total value of the car, but there are plenty of options for no-deposit car loans. You’ll then repay the remaining balance in instalments over the loan period, plus interest. When your loan ends and you’ve paid your final instalment, the car is yours.

You’ll love HP loans if:

  • You have your heart set on a vehicle

If you’ve fallen in love with a model and you know you want to drive it for years to come, HP loans can be a great way to stretch your budget further and own the car outright at the end of the loan.

  • Your deposit is small

It’s hard to save cash which is why HP loans are so popular in the UK. Some lenders require deposits of just 10%. This gets you into the driver’s seat of a new car ASAP and allows you to spread out the total cost of the vehicle over a longer and more manageable period of time. However, you don’t always need to pay a deposit.

You might not love HP loans if:

  • You’re on a strict budget

HP loans offer some great benefits but they’re not necessarily the cheapest option when it comes to monthly payments. If keeping your payments to an absolute minimum is a priority, you may prefer a PCP agreement.

Personal contract plan (PCP)

Like HP loans, PCP agreements start with a deposit. After paying the initial deposit you’ll continue to make monthly instalments over the loan period. At the end of the loan, you have the option to return the vehicle or purchase it outright by making a ‘balloon payment’.

You’ll love PCP loans if:

  • You like to upgrade to a new car frequently

If you’re the type of person who simply has to get their hands on the latest iPhone model the day it’s released, you’ll love the concept of PCP loans.

You might not love PCP loans if:

  • You plan to drive long distances

Many PCP loans come with mileage limits, which means you can’t exceed a certain figure on the odometer if you want to meet the conditions of your contract.

  • You hate cleaning your car

As well as mileage limits, PCP loans require a certain level of commitment when it comes to TLC. You’ll need to keep your vehicle in good condition to prevent penalties at the end of your loan.

Personal loan

Personal loans are similar to PCP agreements, though there’s no option to give back the vehicle at the end of your contract. Initial deposits are generally a little larger than PCP loans, however this often means your monthly payments are smaller.

You’ll love personal loans if:

  • You like to keep things simple

Personal loans are simple and easy, with minimal paperwork and a straightforward structure. If you’re looking for a fuss-free loan option that doesn’t involve much number crunching, a personal loan could be a good bet.

  • You want to own your car outright

If you want to own your car outright with zero limits on things like mileage and wear and tear, you’ll love the freedom that comes with personal loans.

You might not love personal loans if:

  • You have a lacklustre credit history

The nature of personal loans means lenders are a little stricter when it comes to your credit history. If your credit score leaves something to be desired, you may not be eligible for a personal loan. But don’t worry, there are still lots of other great options out there!

  • You have your eye on a luxury vehicle

If you’re eyeing up a luxury vehicle, a personal loan may not secure the cash you need to purchase it outright. Most lenders cap personal loans at around £25,000, making them unsuitable for high-value vehicles.

Personal contract hire (PCH)

The term ‘hire’ says it all when it comes to PCH loans. Under these leasing agreements, you’ll rent the vehicle for a predetermined timeframe, and then return it at the end of the loan. There’s no option to buy or sell the car, making PCH agreements ideal if you love new cars but hate the idea of depreciation.

You’ll love PCH loans if:

  • You have an excellent credit score

PCH loans have an air of exclusivity and are usually only available to borrowers with good or excellent credit scores. If you have a glowing credit history, taking advantage of PCH loan options could be the best type of car finance for you.

You might not love PCH loans if:

  • You want to ‘rent to own’

If you want the option to purchase your car at the end of your loan, a PCH agreement isn’t right for you.  

  • You’re on a strict budget

PCH loans are amazing when it comes to getting behind the wheels of the latest models. However, they can cost more than other car options and may not be the best type of car finance if you’re on a strict budget.

  • You plan to travel long distances

Like other rent-structured loans, PCH agreements usually place limits on mileage and wear and tear. If you want the complete freedom to use the car as you please it may be better to opt for finance that allows you to purchase the car outright.

Choosing the best type of car finance for you

All in all, the best type of car finance depends on your specific circumstances and preferences. At My Car Credit, we’re committed to finding a great deal that’s suitable for all drivers, including those looking for car finance with a poor credit rating,

If you have any questions, you can email us on enquiries@mycarcredit.co.uk or chat to a member of our friendly team on 01246 458 810.

Rates from 6.9% APR. Representative APR 13.9%

Evolution Funding Ltd T/A My Car Credit

My Credit Rating

Excellent

  • You are a home owner
  • You have been on the electoral role for a long period of time
  • You have current credit arrangements and mortgage with no defaults
  • You have no CCJs, credit arrears or missed payments
  • You rarely apply for credit
  • You are employed or self-employed

Good

  • You are on the electoral role
  • You are a home owner or long standing tenant
  • You have a stable employment history
  • You have current credit arrangements with occasional missed payments
  • You have no CCJs

Fair

  • You are or have recently been on the electoral role
  • You may have recently changed address
  • You may have occasional missed payments
  • You may have an old CCJ
  • You may have regularly applied for credit

Poor

  • You may have had frequent changes in address
  • You may not be traceable on the voters roll
  • You may have exceeded credit card limits
  • You may have missed payments on current agreements
  • You may have had a CCJ in the past

Bad

  • You may not be traceable on the voters roll
  • Your credit cards are over their limits
  • You have recent CCJs
  • You may have been refused credit elsewhere
  • You may be in a debt management plan
£

X monthly repayments of
£X

Typical rate

Loan amount

Total payable

X% APR*

£X

£X

*for illustration purposes only

No impact on your credit score

Representative Example

Borrowing £7,500 at a representative APR of 13.9%, annual interest rate (fixed) 13.85%, 47 monthly payments of £201.38 followed by 1 payment of £211.38 (incl. estimated £10 option to purchase fee), a deposit of £0.00, total cost of credit is £2,176.24, total amount payable is £9,676.24.

Evolution Funding Limited, trading as My Car Credit, is a credit broker and not a lender.

Please ensure you can afford the repayments for the duration of the loan before entering into a credit agreement.

Require more help?

Got a question you can’t find the answer to, or need some advice and guidance around taking out car finance? Our Car Credit Specialists are friendly, experienced, and here to help so get in touch today!