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What's the best way to finance a car? PCP, HP, PCH or Personal Loan

Financing your car gives you the chance to spread the price across monthly payments

Car finance

There are a few ways to finance a car, and the best option will always be the one that suits your needs. You can spread the cost of a car and own it when you’re all paid up, lease a car and hand it back when you’re done, or have the option to stick or switch your model at the end of your contract. You might even decide that a personal loan is the best way to go.

Before deciding what method of car finance best suits your needs, it’s a good idea to take a look at your options and weigh up the pros and cons.

How to finance a car? The most popular finance methods

The most popular way to finance a car is usually a personal loan or Personal Contract Purchase (PCP) car finance. Personal Contract Hire (PCH) is the least popular of the car finance options.

Personal Contract Purchase (PCP) car finance

Personal Contract Purchase (PCP) is one of the most popular ways to finance a car. You’ll put down a deposit on the car of your choice, and the remaining balance will be spread across manageable monthly payments.

At the end of your contract, you’ll decide whether to pay the final ‘balloon payment’ and keep the car, or give it back to the finance company and pay nothing.

The balance of your PCP car finance will be based on the depreciation of the vehicle.

You won’t be paying the full value of your car – you’ll be paying the difference between what the car is worth and what it’s predicted to be worth at the end of your contract.

Benefits of PCP

  • You’ll have the option to keep the car or hand it back, so you don’t have to decide at the start of your contract what you’ll do at the end – you’ll have more freedom to decide what’s best at the time.

  • Your monthly payments might be lower than other forms of finance as you’re not paying for the full value of the car.

  • You’ll have the freedom to swap cars every few years, with the option to keep it if you get attached.

Drawbacks of PCP

  • You’ll have to pay the final balloon payment at the end of your contract if you want to keep the vehicle.

  • You’ll have a mileage cap to stick to that will be written into your contract, and you’ll have to pay additional charges if you go over it.

  • You might also be charged if you don’t keep the car in good condition, as this affects the rate of depreciation. Fair wear and tear is allowed for, however.

Hire Purchase (HP) car finance

Hire Purchase (HP) car finance is different from PCP and PCH as you’ll definitely own your car once the finance balance has been paid off.

You’ll start off by paying an initial deposit, and the remaining balance will be spread across monthly payments.

When your contract comes to an end, an ‘option to purchase’ fee forms part of the final payment – after you’ve paid this, the car is all yours.

Benefits of HP

  • You’ll definitely own the car once the finance is fully paid up.

  • The ‘option to purchase’ fee that you’ll pay at the end of your contract is likely to be smaller than the balloon payment you’d have to pay with PCP finance.

  • You can put down a larger deposit to reduce your monthly payments.

Drawbacks of HP

  • Your monthly payments might be larger as you’re paying for the full value of the car plus interest, not just the depreciation figure.

  • You might struggle to get HP car finance with poor credit history, or this might cause higher levels of interest.

  • You don’t own the car until you’re all paid up, so you can’t sell the vehicle or make any modifications without consent from your finance company.

Personal Contract Hire (PCH) car finance

Personal Contract Hire (PCH) car finance is a way to finance a car like a long-term rental, as you’ll hand the car back at the end of your contract.

Also known as car leasing, you’ll get to enjoy your car for a contracted period and swap it for something new when your contract ends.

There are restrictions on your contract that you’ll need to consider, like a mileage limit and damage charges for anything more than fair wear and tear.

Benefits of PCH

  • You can enjoy a new car without worrying about depreciation or selling it on when you’re done.

  • Payments are fixed for the full contract and will usually be lower than if you were paying to buy the car, not lease it.

  • You can often add maintenance packages to your PCH deal to cover the costs of repairs.

Drawbacks of PCH

  • You’ll never be the owner of the car, as you’ll have to hand it back without the option of buying.

  • You’ll have to stay within the mileage allowance that was agreed at the start of the contract, and will be charged if you go over the limit.

  • You might have to pay damage charges if there are issues with the car when you hand it back that aren’t within the limits of fair wear and tear.

Personal loan car finance

Instead of using a car finance company to pay for your car, you might decide to apply for a personal loan from your bank.

These types of loans are not secured against the car like other types of car finance, and they let you be a bit more flexible with your options.

Benefits of personal loan finance

  • You can sell your car before you’ve finished paying your personal loan, as you’ll be the official owner from the start and the loan won’t be secured against the car.

  • You might be able to spread the loan across a longer repayment period, meaning the monthly payments will be cheaper – thought this will mean paying more interest.

  • As you’re the owner of the car, you can make modifications to the vehicle without needing to get permission first – you should check with your insurer first, however, as it may increase premiums or invalidate your insurance.

Drawbacks of personal loan finance

  • It might take longer to get the funds from a personal loan, though some lenders make funds available almost immediately.

  • Monthly payments can be more expensive, although this depends on contract term and costs.

  • You might not be approved for the loan if you have a poor credit history.

What is the best financing option for a car?

There are many different ways you can finance a new car, so it’s a good idea to take a look at your options and decide which one suits your needs.

Learn more about car finance: