Car Finance Options Comparison

Posted (Updated ) by Gemma Simpson

Car Finance Options Comparison

Buying a new car can be exciting, but it also involves big decisions about how to pay. This guide will help you understand the most common ways to finance a car in the UK. We’ll look at Hire Purchase (HP), Personal Contract Purchase (PCP), and Personal Loans.

We’ll also show you how Go Car Credit can help if you have a bad credit history, receive income from benefits, or are self-employed.

Table of Contents

  • 1. What is Car Finance?
  • 2. The Main Types of Car Finance
  • 3. Hire Purchase (HP)
  • 4. Personal Contract Purchase (PCP)
  • 5. Personal Loans
  • 6. Why Choose Go Car Credit?
  • 7. Key Things to Think About
  • 8. Common Pitfalls to Avoid
  • 9. FAQ (Frequently Asked Questions)
  • 10. Conclusion

1. What Is Car Finance?

Car finance is a way to spread out the cost of buying a car. Instead of paying all at once, you pay in smaller amounts over time. This is usually done with interest, which is the cost of borrowing.

If you want to learn more about managing money when buying a car, you can visit MoneySavingExpert for tips on budgeting or Which? to see side-by-side comparisons of different finance products.

2. The Main Types of Car Finance

There are three popular ways people finance a car:

  • Hire Purchase (HP)
  • Personal Contract Purchase (PCP)
  • Personal Loans

They each work in a different way. Below is a quick overview:

  • HP: Pay a deposit, then monthly payments. Once you’ve paid in full, the car is yours.
  • PCP: Pay for the car’s drop in value (its “depreciation”). At the end, choose to either buy the car outright (with a big “balloon” payment), hand it back, or start a new deal.
  • Personal Loan: Borrow money from a bank or lender. You pay the car seller in full right away. Then you repay your loan every month.

3. Hire Purchase (HP)

Hire Purchase is a straightforward finance option. You pay a deposit (often 10% of the car’s price), then make fixed monthly payments until the total amount (plus interest) is cleared. After the final payment, the car becomes yours.

How Hire Purchase Works

  • Deposit: Usually around 10% of the car’s cost.
  • Monthly Payments: You pay off the balance plus interest over 1–5 years.
  • Ownership: You own the car only after the last payment.

Pros of HP

  • Fixed Payments: Know exactly what you’ll pay each month.
  • No Mileage Restrictions: You can drive as many miles as you like.
  • Straightforward: No big balloon payment at the end.

Cons of HP

  • Higher Monthly Costs: You might pay more per month than with PCP.
  • You Don’t Own the Car Straight Away: The lender can repossess it if you don’t keep up payments.
  • Deposit Needed: Many HP deals ask for around 10% upfront.

For more details on HP and your consumer rights, check Citizens Advice.

4. Personal Contract Purchase (PCP)

Personal Contract Purchase (PCP) usually has lower monthly payments because you’re paying for the car’s depreciation, not its full value. At the end, you can buy the car, hand it back, or start a new PCP deal.

How PCP Works

  • Deposit: Often around 10%.
  • Monthly Payments: Based on the difference between the car’s initial price and its predicted resale value.
  • End-of-Deal Options:
  • Pay the “balloon” (often called the Guaranteed Future Value).
  • Hand the car back.
  • Part-exchange it for another PCP agreement.

Pros of PCP

  • Lower Monthly Costs: Payment is generally less than HP.
  • Flexibility: Choose to keep or return the car at the end.
  • Custom Agreement: Usually 2–4 years, with an agreed yearly mileage.

Cons of PCP

  • Balloon Payment: Can be a big amount if you want to own the car.
  • Mileage Limits: Going over the limit can mean extra fees.
  • Wear & Tear Fees: Any damage beyond normal use might cost you money.

5. Personal Loans

A personal loan is an unsecured loan. You borrow money from a bank or lender to buy the car outright. This means you own the car immediately. You then pay back the loan in monthly instalments (with interest).

How Personal Loans Work

  • Apply for a Loan: You ask for a set amount, e.g. £10,000.
  • Receive Funds: If approved, the money goes into your bank account.
  • Buy the Car: Pay the dealer in full.
  • Repay the Loan: Make monthly payments to your lender, usually over 2–5 years.

Pros of Personal Loans

  • Immediate Ownership: You can modify or sell the car whenever you like.
  • Competitive APR: If you have a good credit rating, you can get decent interest rates.
  • No Mileage Limits: There’s no mileage contract to stick to.

Cons of Personal Loans

  • Credit Score Matters: A lower score can mean high rates or rejection.
  • Potentially Large Borrowing: You might be borrowing the entire price of the car.
  • Less Flexibility: You can’t hand the car back like on PCP.

For unbiased info on personal loans and other ways to borrow, look at MoneyHelper.

6. Why Choose Go Car Credit?

At Go Car Credit, we only offer Hire Purchase (HP). We understand that not everyone has a perfect credit history or a steady, regular income. That’s why we:

  • Look Beyond Your Credit Score: We consider self-employed workers, people on benefits, or those with bad credit.
  • Offer Flexible Terms: Between 24 and 60 months, depending on your situation.
  • Have a Quick Application: You can apply online in a few minutes.

Once you apply, we’ll guide you through the process and do our best to find a plan that fits your needs.

7. Key Things to Think About

1. Budget

  • Work out what you can afford each month, including running costs like insurance and fuel.
  • Use an online calculator on MoneySavingExpert if you need help with sums.

2. Length of Your Agreement

  • Shorter terms: Higher monthly payments but less total interest.
  • Longer terms: Lower monthly payments but more interest overall.

3. Credit Rating

4. Future Plans

  • Change cars often? A PCP might suit you better.
  • Want ownership as soon as possible? HP or a personal loan might be best.

5.Deposits

6. Regulations

8. Common Pitfalls to Avoid

  • Only Looking at Monthly Payments: Check the total you’ll pay, including interest and fees.
  • Ignoring Your Credit Score: Poor credit can mean a higher APR (interest). Improving your score can help you get a better deal.
  • Not Reading the Small Print: Look out for fees like late payment charges or penalties for paying off early.
  • Choosing the Wrong Term: Too long = more interest. Too short = too expensive every month.
  • Not Comparing Deals: You might miss better rates if you take the first offer you see.

For more hints, MoneySavingExpert has tips on boosting your credit rating.

9. FAQ

Q: Can I get HP if I have bad credit?
A: Yes. Companies like Go Car Credit can accept people with less-than-perfect scores. You might pay a higher interest rate, but it’s still an option.

Q: Do I always need a deposit?
A: Many HP and PCP deals need at least 10%. Some zero-deposit deals exist, but they often cost more overall.

Q: What if I drive over my mileage on PCP?
A: You’ll likely be charged per extra mile. Check your contract.

Q: Can I use part-exchange for my old car?
A: Yes, many dealerships let you trade in your current vehicle to lower the deposit on your new finance deal.

Q: How soon can I get finance?
A: It varies. Some lenders approve within hours; others take a few days.

10. Conclusion

Choosing the right car finance option can save you money and stress. Remember:

  • Hire Purchase is simple, but monthly costs are often higher than PCP.
  • PCP has lower monthly payments and more flexibility at the end, but has mileage and wear limits.
  • Personal Loans let you own the car straight away, but you need a good credit rating to get the best rates.

Go Car Credit offers Hire Purchase only, especially for those with unique or challenging financial situations.