Finance options

Car finance comes in numerous forms - including PCP and Hire Purchase, with Personal Contract Hire - car leasing - being another option

Jun 22, 2022

Want to change your car but don't have the cash to pay for a new one outright? There are a number of monthly payment options that offer varying levels of flexibility, low interest rates and affordable monthly payments, so you should be able to find the right kind of finance or leasing setup to suit your circumstances.

Whether you’re looking to pay the lowest overall cost to own your next car, want to keep monthly payments to an absolute minimum or need the greatest possible flexibility - with the ability to hand the car back early, for instance - there's a finance option to suit.

The options available include PCP finance and Hire Purchase, along with PCH leasing, which technically isn't a form of finance, as you're effectively renting a car rather than borrowing money to buy it, though it does still offer low monthly payments to access a car. Keep reading for more information on how these work and for help in deciding which one is right for you.

With car finance you can adjust the size of your deposit to find the best balance, too; a larger deposit gets you lower monthly payments or you can go for a smaller upfront payment if you don’t have much spare cash but can afford higher monthlies. You can even source finance for a car with no deposit at all, in many cases.

Other factors you can tweak include the length of the contract and the mileage limit. Longer contracts tend to mean lower monthly payments, but will mean you’ll pay more in interest overall. Meanwhile, lowering the mileage limit can also help you get lower monthly payments, though you'll need to stick to this cap to avoid end-of-contract excess mileage charges.  

Watch our video guide below for an overview of the most popular ways of spreading the cost of a car, to get a feel for which one best suits you. And keep reading for all the details about how PCP finance, Hire Purchase and PCH leasing work.

Personal Contract Purchase (PCP)

PCP is the most popular type of car finance. One of the main reasons for this is that it offers lower monthly payments for a specific car than Hire Purchase or a loan (assuming the same deposit, contract length and mileage allowance), as the monthly payments only cover the amount of value the car is expected to lose over the length of the contract - plus a little interest. PCP finance is available on new cars and used models, typically up to four years old.

At the end of the contract term, you can hand the car back with nothing more to pay - provided you've stayed below the pre-agreed mileage limit and have kept the car in good condition, with no damage beyond fair wear and tear.

If you want to keep the car, you have to make the optional final payment - which is set at the start of the contract - or refinance this amount, to buy it outright. Alternatively, you can effectively trade the car in, putting any equity - should the car be worth more than the remaining balance - towards a deposit on a new finance deal, reducing the monthly payments on your next car. Read more

How PCP finance works

1. Deposit & delivery
  • The larger the deposit, the lower your monthly payments
  • A zero-deposit option is often available
2. Monthly payments
  • A fixed payment is due every month for the length of the contract
  • Monthly payments only cover part of the car's cost, which keeps payments low
3. Buy / return / upgrade
  • At the end of the contract, you can either make the optional final payment or refinance it to keep the car
  • OR Return the car and owe nothing (provided it's in good condition and under pre-agreed mileage limit)
  • OR Trade it in for another car if the car is worth more than the outstanding finance balance

Hire Purchase (HP)

Hire Purchase is nice and simple; it splits the entire cost of a new or used car into a series of monthly payments. Once you’ve made all of the payments, the car is yours - so you're free to keep it, sell it or trade it in for a new car.

Because the payments cover the full cost of the car, they are higher than with PCP finance, but there is no large optional final payment to make at the end of the contract term. In fact, with HP, once you have completed all the monthly payments, you automatically own the car in its entirety. As you're paying off the finance balance faster than with PCP, you should pay less interest overall. Read more

How HP finance works

1. Deposit & delivery

  • Putting down a larger deposit reduces the amount owed, shrinking monthly payments. Zero-deposit options may be available

2. Monthly payments

  • Pay for the rest of the car with a series of fixed monthly payments

3. You own the car

  • Once the final monthly payment is made, the car is automatically yours

Leasing (PCH)

Leasing can be one of the cheapest ways to access to a brand new car, with low monthly payments and potentially small upfront payments. However, because it works like a long-term form of car rental, there's no option to buy the car at the end of the contract.

After an initial payment, you make a series of fixed monthly payments. At the end, you simply hand the car back, typically with no option to buy the car. Leasing is less flexible than car finance, so if you're not sure whether you want to keep the car or hand it back, going for PCP finance is a wiser option. Read more

How car leasing works

1. Initial payment

  • You make an initial payment, which is usually the equivalent of 3 to 12 monthly payments

2. Monthly payments

  • Fixed monthly payments run for the length of the contract

3. Return the car

  • Once all the payments are made, you have to return the car

   

Read more about: