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Car finance options explained

Choosing a car finance option that is right for you can be confusing, and will vary depending on your needs and circumstance

Mention car finance to most people and they’ll probably think of monthly payments that make a brand-new car more affordable, but finance deals can also be used to buy used and nearly new cars. Such as those from Motorpoint, ahem. 

Used-car finance is just as flexible as new-car finance, letting you tweak the deposit amount, payment term and annual mileage to get the perfect deal for you. Better still, our friendly Motorpoint salespeople can sort a finance deal when you buy the car, or work out options beforehand, either in-store, online or over the phone. 

Every Motorpoint car advert also links to a finance calculator, making it easy to work out which cars are in your budget, so you can start dreaming today. All you have to decide is which kind of used-car finance is for you…

What are the different car finance options?

The main two car finance options are Hire Purchase (or HP) and Personal Contract Purchase (often referred to as PCP).

However, Personal Contract Hire (PCH, commonly referred to as Leasing) is another option for new car shoppers, and isn’t restricted to business users. Or, you could take out a personal loan to pay for the cost of the car, which works a bit like a HP contract – you’ll repay the bank or building society instead of a car finance provider.

We’ve listed advantages and disadvantages of each finance type:

Car finance typeProsCons
Personal Contract Purchase (PCP)
  • Lower monthly payments than HP
  • Flexible, with option to own the car at the end
  • Ability to switch to new cars every couple of years
  • You’ll be charged for damage or if you go over the mileage limit
  • Large optional final payment hanging over you
  • The car is not yours until the final payment is paid
Hire Purchase (HP)
  • No mileage or damage charges
  • Best if you want to keep your car for a long time
  • Higher monthly payments than PCP
  • The car is not yours until the final payment is paid
Leasing (PCH)
  • Often the cheapest way into driving a new car
  • More flexibility in terms of contract length
  • Road tax included
  • You’ll never own the car
  • You’re stuck with the car for the duration of the contract unless you pay high exit fees
  • Charges for damage and excess mileage
Personal Loan
  • Once you’ve bought the car, it’s yours outright
  • Can usually spread a loan out over a longer term
  • No mileage or damage charges
  • May affect your ability to get loans for other purposes – i.e. house renovation
  • Limited protection if your car is stolen or damaged

Hire Purchase (HP)

Spread the cost of buying your car with fixed monthly payments. At the end of the agreement, you will own your car outright.

This is the best option if:

  • You want to own the car at the end of your agreement
  • You want the total amount that you have borrowed paid off by the time you reach the end of your car finance agreement.
  • You don’t want to commit to monthly mileage limits 

Because there’s no optional final payment (as there is with PCP), monthly payments on an HP have to be higher, but this gives you complete freedom with how you use the car, including not having to stick to an agreed mileage limit.

Personal Contract Purchase (PCP)

Purchase your car with lower monthly payments, by deferring a large portion of the credit into a final repayment at the end of your agreement.

This is the best option if:

  • You would prefer lower monthly payments
  • You’re planning to change your car at the end of the period
  • You are able to commit to a monthly mileage limit

When you come to the end of your agreement, you have three options: returning the car to the dealership, making a final payment to buy the car, or getting another car.

A PCP keeps monthly payments comparatively low because a large chunk of the car’s value is bundled into an optional final repayment, often called the ‘balloon payment’, which is based on the car’s Guaranteed Minimum Future Value (GMFV). You’ll just need to stick to an agreed monthly mileage limit, but you can always go over it for an agreed pence-per-mile surcharge.

Personal Contract Hire (PCH, or leasing)

Leasing is becoming a more popular way to get behind the wheel of a brand-new car every few years. Often, leasing offers cheaper monthly payments and/or a lower upfront payment than an equivalent car financed through PCP, and you can typically choose to lease a car for one to four years.

Lease deals are typically offered by third-party companies rather than franchised main dealers, although some dealers are starting to offer a leasing product. You pay an initial rental – usually a multiple of the monthly payment – then an agreed number of monthly payments. Once you’ve made all the payments, the car goes back to the lease company. In most cases, you won’t be given the opportunity to buy the car at all.

This is the best option if: 

  • You don’t care about owning the car at the end of the contract
  • You want a brand new model every couple of years
  • You want low monthly payments

Personal loan

A bank loan is worth considering if you’re looking at taking out HP finance. It works the same way that all loans do – once you’ve been accepted, the bank will give you a lump sum of money which you can use to buy a car outright – i.e. pay the cash price. You’ll then repay the bank over an agreed term, which can be longer than a HP agreement – but be aware that the longer the term, the more you’ll pay in interest.

Interest on personal loans can vary wildly depending on your personal situation and credit history, so a loan could work out more expensive than a HP deal in some scenarios. Plus, taking out a loan for a car can impact your ability to get another loan throughout your agreement – perhaps if you wanted money for a wedding or for home improvement, for example.

This is the best option for:

  • Owning the car right from the get go – handy if you want to modify it or use it for non-standard use
  • Buyers who want to spread the cost of a car over as long as possible
  • Potentially low interest rates versus a HP deal

What is the difference between HP & PCP?

The main difference between these two types of car finance is what happens with regards to ownership at the end of your agreement.

When you buy a car using Hire Purchase, you make regular monthly payments towards the total value of your agreement. Once you have made your final payment you will own the car outright.

Cars purchased using PCP often have lower monthly payments due to you only making repayments on a smaller proportion of the value of the car. This means that you won’t own the vehicle when you get to the end of your agreement. You do however have the choice of buying this at the end of your agreement (often referred to as the ‘balloon payment’), or returning it, or trading it in to a dealer and taking finance out on another vehicle. Cars returned at the end of the agreement must be in good condition and within the agreed mileage limit in order to avoid incurring additional charges.

The other difference is that cars purchased using PCP are subject to mileage limitations, whereas those purchased with a HP agreement are not.

What is the difference between PCP and leasing?

Salesperson and customer standing by car

PCP and leasing (PCH) both typically involve an upfront payment – known as a deposit for PCP deals and an initial rental for PCH deals, although zero-deposit finance is available on PCP – and a set number of monthly payments without paying the total cost of the car, but there are differences.

The main one is that PCP finance offers you the ability to buy the car at the end of the deal, if you want. Conversely, once a lease deal is up, the car is almost always returned to the lease company and there’s no chance to buy the car or extend the lease.

You can build up ‘equity’ in your car on a PCP deal – in other words, when the car is worth more than the Guaranteed Minimum Future Value. Any equity can be rolled forward into a new PCP deal to make it cheaper. Just like if you sell your home for more than you paid for it and put the money you’ve earned as a deposit for a new house. You can’t do that with leasing as you haven’t built up any equity – you simply have to start a new contract by paying another initial rental fee.

Provided you’re a good chunk through your PCP deal, it’s a far more flexible arrangement than leasing is. If you need a different car – maybe a bigger one if your family grows – then a new PCP deal can often be organised fairly easily, provided you can pay the difference if there’s money owed on your old car. If you’re a certain way through your PCP agreement and can’t afford the monthly payments anymore, you can arrange to give the car back and stop paying for it – besides any charges for damage or excess mileage, if applicable.

Leasing is not very flexible – you’ve agreed to rent a car for a certain period of time and that’s essentially the end of it. You cannot change the lease partway through – you’ll need to end the lease early and incur some (usually pretty hefty) exit fees.

Which type of car finance is best?

There is no one best option. The car finance approach you choose to take is entirely down to your needs, requirements and circumstances. Asking yourself some of these questions may help you come to a decision about which type of finance is best for you:

I want lower monthly payments

If low monthly payments are your priority then PCP is your best option. This is because you are not paying monthly payments towards the full cost of your car, but a small portion of the credit.

Leasing may offer the lowest monthly payments on brand-new cars.

I want more flexibility with my car finance

PCP is the most flexible type of car finance. At the end of your contract, you have three options – give the car back and walk away, transfer onto a new PCP agreement using any equity built up from your current agreement, or pay the optional final payment to make the car yours.

Often, you’ll be able to refinance the optional final payment if you want the car but can’t afford a big lump sum – at the cost of extra interest. PCP is also more flexible if your circumstances change during your agreement.

I want to keep my car at the end of the agreement

If long-term ownership is what you’re looking for then opt for Hire Purchase. Once you have made the final payment of your car finance plan, you will own the car.

I want to own my car outright

Taking out a bank loan and using that lump sum to pay for the car is the quickest way to own a car outright. You’ll be the legal owner – not a finance company – but you’ll need to be able to pay back the bank over the specified time period.

Why buy a car using finance?

Nearly new cars at Motorpoint Coventry

Spread the cost of buying a car

Saving up to buy a car can be a long journey, especially if you’re not able to put a lot aside each month. Buying a car using finance gives you the option of spreading the cost of your car, with affordable manageable payments.

Upgrade your car

Car finance may also allow you to purchase a better car.

For example, let's say that you have managed to save £5,000 to buy your next car. Rather than using all this money to buy an older car at this value, you could use some of your savings as a deposit towards a more modern, safer, more efficient car.

With car finance, you can choose how much deposit you put down, depending on how much you want to borrow and how much you are able to pay each month. You may decide that you want to use £3,000 of your £5,000 savings as a deposit and finance the remaining car value. This allows you to hold some of your savings back to put towards other purchases e.g. car insurance, or keep it in your savings account for a rainy day.

Lower monthly payment

Your monthly payments will be lower, especially if purchased using PCP as you are only paying off a small proportion of the original value of the car. 

Change your car every few years

If you aren’t intent on keeping your car long-term, opting for PCP allows you to change your car for a different one instead of paying the final repayment at the end of the agreement.

How does car finance work?

PCP finance largely works by calculating how much the car will be worth at the end of the contract – that’s the Guaranteed Minimum Future Value, sometimes also called the optional final payment or the balloon payment. Basically, a PCP contract sees you pay for the car’s depreciation over a set time, not its overall value.

Let’s compare two cars costing £20,000, where one is forecasted to be worth £8,000 at the end of the contract and the other is forecasted to be worth £10,000. Because you’re paying the difference between the current value and what it’ll be worth at the end of your contract, the car with the GMFV of £10,000 will have lower monthly payments than the car with the £8,000 GMFV, despite the two cars seemingly costing the same.

Things to remember when buying a car using finance

Salesman shaking hands with customer

There are also a number of important considerations to take into account when financing a car.

Keeping up with payments – ensure you are able to keep up with your monthly payments for the entirety of your agreement. As you won’t own the vehicle outright, missed payments could result in losing your car. This will almost certainly affect your credit score and make you less appealing to lenders in future.

Stick to your agreed mileage limit – you must ensure you stick to your agreed mileage limit when buying a car using PCP. If you do not you may incur additional charges when you get to the end of your agreement. If you can’t commit to this, Hire Purchase may be a more suitable option.

Think about purchasing an extended warranty – many nearly new cars will still have some of their original manufacturer’s warranty, however you can add an additional 1 or 2 years with products such as Motorpoint Warranty. By extending your warranty you have the added peace of mind that you are protected against cost incurred in the event of an electrical or mechanical failure of a covered component, or breakdown/immobilisation of the vehicle.

Keep your car looking as good as new with Williams Paint Protect – this helps to protect your car against the weather and other environmental pollutants. It can be used to protect paintwork, bumpers, alloys and internal fabric, and comes with a lifetime value. Such products are particularly beneficial if you have purchased your car using PCP, and wish to return it at the end of your agreement, helping you maintain its condition when the time comes to return the vehicle.

Can you buy a car with a credit card?

It is possible to pay for a car with a credit card, but it’s not common. You’ll need a low interest or 0% APR credit card, and you’ll need to make sure you can pay off the balance on time to avoid increased interest and getting into debt.

What’s more, you need to make sure your credit card has a high enough limit to cover the cost of the car you’re thinking of buying – and that your credit card company will let you spend a large amount in one go. You also need to check whether the car dealer takes credit cards, as not all do.

Using a credit card lets you pay lower monthly payments than a typical finance deal, but it’ll take you much longer to pay the card off if you’re only making the minimum payment each month.

Read more on car finance:

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