Buying a car on finance

How to buy your ideal car on finance: the pros and cons of PCP, HP and PCH

BuyaCar team
Apr 25, 2019

Buying a car on finance makes the whole rigmarole of car buying simpler. It allows you to pay for a car in monthly instalments, helping you budget your month ahead.

Using finance adds flexibility too - you can buy outright, lease for a set amount of time with the option of buying, or rent for a short amount of time.

Strong competition keeps interest rates low, there are often incentives, no-deposit options or - for some new cars - 0% interest.

With so many options, you’ll want to make sure you’re getting the best deal. We’ve got all the details below to ensure that you make the right choice.

BuyaCar works with a panel of lenders to provide competitive quotes for all circumstances. For a no-obligation quote, you can apply online or call on 0800 050 2333


Buying a car on finance: your options compared

There are three popular types of car finance available. See the main differences below and click or scroll down for more detail on each one.

  • Personal Contract Purchase (PCP) 
    Flexible finance for new and used cars with low, fixed monthly payments. At the end, you can return the car, buy it or (in many cases) trade it in, making it easy to regularly upgrade. More details
  • Hire Purchase (HP), also known as Conditional Sale Spreads the cost of a new or used car in fixed monthly instalment. Once all payments are made, you own the car. More details
  • Leasing, also known as Personal Contract Hire (PCH) 
    This is long term new car hire, with low, fixed monthly payments. You return the car at the end. More details

An alternative option is to take out a personal loan. This doesn't offer the lower repayments of leasing or PCP.


Types of finance

These features will apply in most cases, but it's important to compare your options to find the one that suits your needs and offers the best value.

Monthly payments

No-deposit option

Do you own car?

Mileage charges

Damage charges





✔ *

✔ *




at end





Bank loan








*Only if the car is returned


Personal Contract Purchase (PCP)

Best finance for low payments and flexibility at the end of the agreement

1. Deposit & delivery
  • The larger the deposit, the lower your monthly repayments
  • A no-deposit option is often available
2. Monthly payments
  • A fixed payment is due every month for the rest of the agreement
  • You only repay part of the car's cost, keeping instalments low
3. Buy / return / upgrade
  • Pay the remaining balance or refinance to keep the car
  • OR Return the car and owe nothing
  • OR Trade-in for another vehicle if the car is worth enough

With low monthly payments and flexibility the end of the agreement, PCP combines the most attractive bits of all the finance options. It often attracts the most generous discounts, and makes it easy to change your car every few years.

You can adjust the length of the agreement, the mileage limit and the deposit to find an affordable monthly payment. You’ll often have the option of paying no deposit at all.

Payments are relatively low because they aren't base on the full price but the value that it's expected to lose during the agreement. This is the difference between the price at the start and its estimated value at the end, called the guaranteed minimum future value (GMFV) or balloon payment.

At the end of the PCP, you have the option of making the balloon payment or refinancing to keep the car or simply returning the vehicle. Often, the car is worth more than the balloon payment at the end. In this situation, you can trade it in and use the surplus towards your next car. Read more

    PCP finance: what’s the catch?

    You may pay a little more for the flexibility of a PCP compared with leasing. In other words, leasing generally offers lower monthly payments. Under a PCP, you will be charged a penalty if you return the car and have exceeded the mileage limit agreed at the beginning of the deal, or if the car is damaged.


    Hire Purchase (HP)

    Best finance for Owning a vehicle when buying a car on finance

    1. Deposit & delivery

    • A deposit reduces the amount owed and may be optional

    2. Monthly payments

    • Pay for the rest of the car in fixed monthly instalments

    3. You own the car

    • Once the final payment is made, the car is yours.

    The idea of HP is simple: the cost of your car is spread over a series of monthly payments. Once you’ve made the final payment, the car is yours.

    You can reduce your monthly payments by choosing a longer deal, or pay the car off quickly over a short period of time with larger instalments. You’ll often be able to arrange an HP deal without a deposit and there are no mileage limit penalties or charges for damage to worry about if you make all of your payments. Read more

    HP finance: what’s the catch?

    Monthly payments are higher than with PCP or PCH lease deals because they cover the full cost of the car. You only own the car once all of the finance has been paid off, so can't sell it or modify it without permission until then. At the end of the agreement, there's no guaranteed trade-in value if you want a new car.


    Leasing (Personal Contract Hire / PCH)

    1. Initial payment

    • Initial payment is usually the equivalent of 3 to 12 monthly instalments

    2. Monthly payments

    • Fixed monthly payments throughout the agreement

    3. Return the car

    • Once all payments are made, you return the car.

    You’re not actually buying a car when you take out a PCH deal: you’re hiring it for a period of time and paying a set monthly fee. This usually makes a PCH agreement the cheapest way of driving a brand new car.

    PCH deals are mainly offered on new cars, and usually require a deposit that’s equivalent to three-, six- or nine-months’ worth of lease payments. Read more

    Leasing: what’s the catch?

    At the end of the deal, you hand the keys back and are left with nothing to show for your payments. There's no guaranteed option to buy the car, If you exceed your mileage limit, or return the car damaged, then you will be liable for penalty charges.

    Repayments for PCP and leasing are calculated on the particular car that you choose, taking into account factors such as your annual mileage and the speed at which a car loses value. An alternative option is to take out a personal loan. This doesn't offer the lower repayments of leasing or PCP.


    Personal loan

    Best for owning a car straight away

    If you take out an unsecured personal loan, then the car that you buy is yours from day one, which means that you’re free to fit it with a towbar, big exhaust or tinted windows if that’s your wish. You can also sell it at any time.

    Other forms of car finance are usually secured on the vehicle. This means that, until they are fully paid off, the car is not yours, so it can’t be sold and you’ll need permission to modify it.

    With intense competition among lenders, you can usually secure a competitive rate of interest.

    Personal loan: what’s the catch?

    Unsecured loans may have higher interest rates than car finance and could also affect your ability to take out other credit or loans. Most car sellers save their biggest discounts for customers buying on finance so if you buy this way, you miss out on any low interest offers and deposit contributions that are offered on new and used car finance deals.

    You'll also be paying off the full cost of the car, which will usually make your monthly repayments higher than with PCP finance or leasing. And as you own the car, there’s none of the flexibility of a PCP.
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    Buying a car on finance: need to know

    Compare the right interest rate 
    There are two interest rates for every finance agreement. The base rate, which is the interest charged on the loan, and the APR interest rate, which includes other charges, such as arrangement fees. The APR enables you to compare the true cost of finance between providers.

    Check the total amount payable 
    Do you opt for 0% finance on a new car, or a higher interest rate that comes with a bigger discount on the price? There's no need to re-live your Maths GCSE: finance quotes include the total amount that you pay over the course of the agreement, making it easy to compare deals.

    Lease or buy a car? 
    If you want a car for three or four years only, then leasing may be best for you: PCP and PCH offer low monthly payments. At the end you can return the car with nothing more to pay (PCP offers additional options). It's then straightforward to get another car. If you're buying a vehicle for the long term, then Hire Purchase makes you the owner after the final payment.

    Credit score 
    Finance companies use credit scores to calculate the risk of lending to you. High scores are required to access the lowest interest rates and cheaper monthly payments but finance can still be affordable with a poor credit history. Young driver finance can help 18-21-year-olds to buy a car - as long as they can show that the repayments are affordable. 


    Getting the best deal when buying a car on finance

    Whatever type of finance you take out, it’s worth considering the total amount that you’ll have to repay, rather than simply looking at the monthly repayments.

    As the example below shows, you can save hundreds of pounds - even thousands - by opting for a shorter finance period with higher monthly payments, if they are affordable.

    Car valueInterest rateHire Purchase agreement lengthMonthly paymentsTotal payable
    £10,0007.9%3 years£312£11,232
    £10,0007.9%5 years£201£12,060


    Deposit The larger deposit you have, the lower your monthly payments will be. You’ll also pay less in interest as you’ll be borrowing less money. If your savings are limited, then you may be able to get a car with no deposit finance.

    Length of finance term The longer the term, the lower your monthly payments should be. However, the total amount you pay will be higher. This is because you’ll be borrowing money for longer, so you’ll be paying more in interest. It's a similar case if you're leasing with PCH. Longer leases often offer lower monthly payments, but you'll pay more overall because you are renting the car for more time.

    Car value In some cases, you might see that one car costs less to finance than a cheaper one. That's not necessarily an error: the most important factor in the cost of finance is how much value the car will lose over the agreement: the monthly cost of a PCP or PCH agreement is based on this figure, so a car that holds its value well will cost less to lease than one that loses a lot.

    Interest rate The better your credit score, the lower your interest rate will be, which helps to keep your monthly payments low.

    Cars available with PCP finance


    Can I cancel the agreement early if I buy a car on finance?

    Yes. If your circumstances change and the PCP or HP payments become unaffordable, or if you need a different type of car, then then you can settle your agreement early.

    You'll firstly need to ask your lender for a settlement fee: a one-off amount you'll need to pay to end the contract.

    If your car is worth more than the settlement fee at that time, then you should be able to sell or part-exchange it for another car without too much difficulty. The lender will need to be involved, as they own the car, and most of the money will go straight to them in order to cover the fee. The surplus can either be returned to you or put towards the cost of your next vehicle.

    If the fee is more than the car's value, then you'll need to make up the difference using your own funds. In some cases, negative equity finance can help to spread this cost. The difference is added to the finance for your next car and you make one monthly payment to cover them both. If your new car is cheaper than the previous one, then this can still reduce your monthly payments.

    Ending a lease is not always as easy. You will almost always have to pay a settlement fee. This may amount to all of the remaining monthly payments.

    In some cases, it may be worth refinancing your current car before your agreement is finished, even though you could be liable for extra charges. If you can switch to a deal with a cheaper interest rate, then the lower payments could pay for themselves.

    Paying off your PCP or HP finance early will usually work out cheaper than continuing paying in instalments because you will pay less interest. There will usually be a one-off settlement fee that covers some of the interest that the lender misses out on.

    If you take out PCP or HP finance, you have the right to end the agreement with a voluntary termination under legislation in the Consumer Credit Act 1974. You can do this without penalty if you’ve already paid more than half the total amount that you owe (including the final payment to buy the car with PCP agreements) and don’t have any late payments outstanding. You can also voluntarily terminate the agreement at an earlier stage but you’ll be charged a lump sum that’ll bring your total payments to half of the total cost of the agreement.


    What happens if I crash a car bought on finance?

    Finance companies usually require cars to be covered by fully comprehensive insurance, which would cover repairs.

    If the car is written off, then the insurance payout should cover the value of the car at the time. This goes to the finance company, as they are the car’s official owner.

    If the payout is less than the amount that you owe, then you’ll still have to make up the difference. You can take out guaranteed asset protection (GAP) insurance to cover this difference.

    Many insurers offer new car replacement cover. If you have an accident in the first 12 months of owning a car, then they will cover the cost of a brand new replacement, which is likely to clear your debt to the finance company.


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