Compare car finance options

Buying a car can be a difficult decision to make. You need to make sure the method of payment you choose is affordable and will give you the best overall outcome. There are more car finance options than you might think, so you should carefully weigh up the pros and cons of each whilst considering your current financial position.

We have also put together an infographic to help you decide which car finance option is right for you.

Car Purchase and Finance Options: Pros and Cons

Here we discuss the main ways to finance a car:

Cash Purchase

Buying a car with cash seems like the safest option as it won’t result in any debt or added interest. There are downsides to this method of payment however and you should only do this if you can comfortably afford to. If buying a car means stretching yourself financially and sacrificing other important payments to find the funds, then car finance could be a better option for you.

Pros

  • You will have full ownership of the car as soon as you make the payment.
  • There are no monthly finance costs or added interest to worry about.

Cons

  • You will be using up a large amount of your savings at once that could go towards other priorities.
  • You might only be able to afford a cheaper, less reliable car than you could afford if you paid for it monthly.

Hire Purchase (HP)

Hire Purchase – also referred to as HP – is a form of finance where you pay the purchase price of the car in monthly instalments over an agreed period of time with added interest. A HP agreement is likely to run over 3-5 years and you can usually choose to put down a deposit to lower your monthly payments.

Pros

  • Suitable if you have bad credit or a poor credit history, as providing you make payments on time, this can help improve your credit score.
  • Once all payments due under the agreement have been made, you will own the car.
  • Low deposit payments – sometimes it’s not necessary to even put one down.
  • Flexibility in the length of payment terms.

Cons

  • The interest rate will likely be higher than other finance types.
  • You won’t immediately own the car.
  • If payments are not made there is a risk that the car could be repossessed by the lender.

Personal Contract Purchase (PCP)

Personal Contract Purchase – also known as PCP – is similar to hire purchase but instead of paying off the purchase price of the car monthly, you will only pay the estimated depreciation cost of the car (based on its original value).

At the end of the agreement, you have the option to:

  • Purchase the car by paying off the remaining amount due under the agreement;
  • Give the car back to the dealer and pay nothing; or
  • Trade the car in and start a new contract.

Pros

  • Providing you make payments on time, it can help to improve your credit score.
  • Lower monthly payments than other finance options.
  • It’s flexible, with several options to choose from when the contract is up.

Cons

  • You won’t own the car for the duration of the contract and will only if you choose to pay the balloon payment at the end.
  • The future value of the car is based on ensuring it is kept in good condition, so there will likely be further charges for anything that isn’t normal wear and tear.
  • You can be penalised for extra mileage on the car than what was initially estimated.

Personal Loan

A personal – or unsecured – loan used to buy a car is the same process as taking out any personal loan.  A sum of money is borrowed from a bank or lender and is paid back on a monthly period over an agreed amount of time with interest added.

Pros

  • You will immediately own the car as soon as you purchase it.
  • Providing you make payments on time, it can help to improve your credit score.
  • You can shop around for your car to get the best deal.
  • The loan isn’t secured against the car which means if you do default on payments you won’t automatically lose the vehicle.

Cons

  • Loan approval is typically based on having a good credit score.
  • You may have to wait for the loan provider to release the funds to you before you can purchase your car.

Car Lease

Leasing a car is where you pay a monthly fixed cost for the use of a car over an agreed period of time. You don’t own the car during the agreement and at the end of the term you give the car back and can take another lease out if you choose to.

Pros

  • Providing you make payments on time, it can help to improve your credit score.
  • You don’t need to worry about the car depreciating in value.
  • Lease payments are typically lower than loan payments.

Cons

  • You never own the car.
  • Potential extra costs if you go over the mileage limit.

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