Car finance: know your options
You can't beat the sense of freedom that comes with owning a car. But with so many finance options available, it's easy to feel lost when choosing the one that's best for you.
With over 2 million cars bought on finance August 2024 to August 2025, it's clear that buying a vehicle outright isn't always ago-to option for many of us.
It's smart to know your options before signing on the dotted line. Use our guide to learn more about car finance.
Understanding car finance options
Car finance means borrowing money to buy a car. Instead of paying with savings, you agree to pay back in instalments. Some include interest or other fees. When you finish paying, you can keep the car, trade it in, or return it, depending on the deal.
Sounds straightforward, right? But it's the finer details that really matter. Here's a guide to the main options:
- Hire purchase (HP)
To get a car on hire purchase, you need to pay a deposit (usually 10%). You then pay the balance off in fixed monthly instalments. You'll still need to pay for maintenance, but you can do as many miles as you like. Once the balance is clear, you own the car. - 0% finance
Like other types of finance agreement, you'll pay monthly instalments to repay the total cost borrowed. But there's no interest to pay on your debt, provided you keep to the agreed-upon repayment schedule. - Personal contract purchase (PCP)
Like hire purchase, you pay a deposit, but the car's resale value is deferred until the end of the agreement, meaning your fixed monthly instalments can be lower. Your mileage will be limited to an agreed level, and you include maintenance in your monthly repayments. You return the car at the end of the agreement or pay the resale value and keep it. - Personal car loan
This involves borrowing money from a bank or building society to buy the car outright. There's no initial deposit, and you make monthly repayments with interest over one to seven years. No mileage limits are involved, but you must cover all servicing costs yourself. - Personal contract hire (PCH)
This is a lease agreement under which you never own the car outright. You pay a few months' value upfront (typically three months), followed by a monthly amount. Costs for servicing and car tax are included, so all you need to pay for is fuel. When the agreement ends, you return the car.
What is hire purchase and how does it work?
Hire purchase is one of the simplest car finance options. You hire the car for an agreed time, then pay the final instalment plus an 'option to purchase' fee, and the car's yours. It's available from dealerships and brokers, so it's worth shopping around for the best deal. Plus, it works for both new and second-hand cars.
Pros of hire purchase
- Flexible repayment periods (1-5 years)
- Lower deposit options
- Fixed payments help with budgeting
- No mileage limits
- Possible to return the car early in some deals
Cons of hire purchase
- Longer loans cost more in interest
- You don’t own the car until you've fully paid
- Repossession if you miss payments
- Cannot sell or modify without permission
Things to consider
Many drivers like hire purchase because they can drive away with the car they want for an affordable monthly fee. Longer terms can help make higher-spec cars more affordable, but watch out for extra costs over time.
What is 0% finance, and how does it work?
0% interest is a type of car finance where you can borrow a set amount to purchase your car, which will be repaid in a series of monthly instalments. The main selling point of 0% finance is that you won't have to pay any interest on the amount you borrow. With a 0% finance deal, all you pay is your deposit and the payments each month.
Pros of 0% finance
- Save on interest payments
- Usually on new cars
- Can get a good deal on newer models
Cons of 0% finance
- Needs a strong credit score
- Usually need a bigger deposit (10-40%)
- Might be offered on less popular cars
Things to consider
If you're applying for 0% financing on a car, you won't be able to be as fussy with your car choice as it's not offered on all models. You also need a very good credit score, so the lender can be confident that you can afford the repayments and won't miss any.
In some cases, the deposit might be significantly higher than that of other finance types, so you'll need to pay more upfront. But this lowers your monthly repayments, so you may be able to pay off the finance faster.
What is personal contract purchase and how does it work?
Personal contract purchase (PCP) is broadly like HP, but with a few extra complexities. Like hire purchase, it’s used for both new and second-hand cars. It involves an initial deposit — usually around 10% of the car’s full value — and regular monthly repayments over an agreed term of typically three to five years.
At the outset you’ll agree the minimum resale value (to you) at the end of the term, when you’ll have three options:
Pros of personal contract purchase
- Lower monthly payments
- Guaranteed resale value.
- Flexible options at the end
Cons of personal contract purchase
- The balloon payment can be high
- Mileage limits and penalties for excess miles
- Need to keep the car in good condition
- If the resale value is close to the actual value, there’ll be a smaller balance, so you’ll have less of a deposit to get another deal.
Things to consider
Many people choose PCP to get a higher value car at a reasonable monthly cost. But watch out for extra charges if you go over the mileage limit, or if you damage the car.
What is a personal loan and how does it work?
A personal car loan does what it says on the tin: it's a personal loan you use to buy a car. You can choose to borrow from a bank, building society or other institution, like a credit union, and repay the amount over several years. The loan doesn't have to cover the entire cost of the car —you might only need to top up what you've already saved.
If you choose this options, you may need to pay a little more than you would with the other finance options. But you'll own your car from the outset and could pay back less in capital and interest than other car finance options.
Pros of a personal car loan
- Simple and clear
- You own the car immediately
- You can choose your repayment length
- You're free to use the car however you like
- Option to cancel as personal loans have a 14 day cooling off period.
Cons of a personal car loan
- Interest rates vary
- Your credit score affects approval and rates
- You pay for servicing and repairs yourself
- Monthly payments can be lower, but may be higher than other forms of finance, depending on the loan term
Things to consider
It’s worth bearing in mind that you’ll be left to your own devices to cover all repairs as you own the car from the start.
There’s also a lot of choice when choosing a car loan so it could be worth taking independent advice or using comparison sites before applying to find the best deal.
What is personal contract hire and how does it work?
Personal contract hire is a lease agreement. It involves the same level of financial commitment as other methods – an initial deposit and an agreed monthly fee – but without any option to buy at the end. Personal contract hire agreements usually last two to four years and are more typically applied to new cars.
Pros of personal contract hire
- No interest charges
- Drive a brand new car and change every few years
- Servicing, MOTs, and tax are often included
- Usually covered by a warranty.
Cons of personal contract hire
- Mileage and condition limits
- Possible extra charges for damage
- No option to buy or sell the car
- Usually a processing fee to set up your deal
Things to consider
Many like PCH because they don’t worry about servicing costs and repairs. The manufacturer's warranty covers cars financed under personal contract hire. But you’d have to pay for anything above wear and tear and get the car fixed before handing it back to avoid fines. It’s worth checking the definition of ‘normal’ wear and tear in your agreement and what would be classed as ‘damage’, so you don’t end up out of pocket.
Pay attention to the extras in your lease package as well and ask about servicing, MOT and road tax costs to make sure the cost of servicing the car would be less than you’d pay outside the contract.
Just be sure you understand the damage and mileage rules to avoid costs.
Seven things to think about before buying your next car
- Shop around for the best deal. It’s worth looking at more than one source and comparing deals.
- Check independent comparison sites or ask for independent advice.
- Don’t be pressured by salespeople into a deal you don’t want.
- Remember to take the long-term view. The monthly repayments may be enticing, but if you’re paying them over a longer period, you’ll end up paying more.
- Pay attention to penalties related to your finance type, like mileage limits and damages.
- When you’ve decided get everything in writing, no handshake deals.
- Pay attention to terms and conditions. Know exactly what charges you could face if you don’t meet them.
Can I afford car finance?
No matter what financing option you decide is best for your needs, the most important decision you can make is whether or not you can afford the financial commitment of car finance. Once you sign on that dotted line, you're entering a legally binding contract, so be sure you're ready for this step.
A few things you should consider when taking out finance are:
- Is this the most affordable option?
- Are you committing to more than you can reasonably afford?
- Can you still afford your other essential commitments (mortgage/rent, bills, cost of living etc.)?
- Are your financial circumstances likely to change in the future?
- When you’ve made your decision, get everything in writing, no handshake deals.
If you're worried that you might be getting yourself into financial difficulties, contact Citizens Advice – they'll be able to give you the right advice for your personal circumstances.
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