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Car finance options explained: how to get the best deal

Discover the different car finance options to find out which is best for you
Jack MurphyMarket analyst

When you’re buying a car from a dealer or broker, it’s likely you’ll be offered a finance scheme - a package that sees you pay off a car in fixed instalments.

In this guide, we explain the different types of finance plan available - including hire purchase, personal contract purchase and leasing - revealing the pros and cons for each.

There are also other ways to pay for your car that could be cheaper than dealer finance and suit you better, such as credit cards or personal loans.

We look at all the options available to help you make the best decision for your needs and financial circumstances.


Dealership or broker? Get the best deal by reading our guide on where to buy a car


What are the different car finance options?

With so many options, car finance can seem complex. Here, we explain the main finance options along with key information to help you decide what’s best for you.

Hire purchase  

With a hire purchase (HP) agreement, you’re hiring a car directly from a lender - paying an initial deposit and then making monthly payments for the cost of the vehicle. You eventually gain ownership of the car, but only after your final payment. While the finance company remains the legal owner during the HP agreement, you’re recorded as the registered keeper. This means you'll usually need to cover servicing and car insurance costs - these costs are sometimes included in the agreement, so it's worth checking before you sign.

Pros

  • After your final payment, the car is yours to keep
  • Payments will usually be a fixed amount over a time period agreed upon from the start
  • As you will eventually own the car, you needn't worry about predetermined mileage restrictions or what condition the car is in at the end of the agreement

Cons

  • Monthly payments can be higher than other finance options
  • You do not own the car until your last payment
  • As your loan is secured against the car, it could be repossessed if you miss payments

Personal contract purchase

A personal contract purchase (PCP) agreement typically involves paying a deposit followed by monthly instalments over a fixed period - these payments will vary based on the pre-agreed mileage limit. Like hire purchase agreements, you may have to pay for servicing and general upkeep unless the dealer includes it as part of the package, so be aware of this when negotiating a deal.

At the end of the PCP period you have the choice to either return the vehicle or purchase it outright by paying a lump sum (also known as a balloon payment), which will have been agreed at the start of the deal based on the minimum future value the dealer believes it will be worth. You may also be able to refinance it with a new PCP deal. 

Pros

  • You can choose whether to keep the car at the end of the agreement
  • As there is a large lump sum payment at the end of the deal, monthly payments are usually lower than HP agreements

Cons

  • If you decide to keep the car, the final lump sum payment can be expensive
  • Interest on the final balloon payment is included in the monthly payments, whether you want the car at the end or not
  • If you return the car at the end of the agreement, you'll be charged for any damage or excess mileage

Personal car leasing

Similar to PCP, personal car leasing involves putting down a deposit before paying monthly instalments on a car over a fixed period of time. Unlike PCP, there is no option to buy the car outright at the end of the agreement and you are effectively renting a car.

Pros

  • Usually one of the most affordable ways of driving a new car in the short term
  • Additional extras such as road tax, breakdown cover and annual servicing are sometimes included, but this will vary from dealer to dealer

Cons

  • You will never own the vehicle (the car is always handed back at the end of the lease agreement)
  • You must keep on top of mileage limits and the car has to be kept in good condition, otherwise you may face extra charges when you return it

Car leasing companies rated

We asked Which? members and the general public to tell us about their experiences with car leasing companies.

Nationwide Vehicle Contracts
76%
Arval UK
75%
Select Car Leasing
74%

Source: Which? survey of 654 people (Which? members and general public), in March-May 2023

The three companies that were surveyed could hardly be separated, with Nationwide Vehicle Contracts, Arval UK and Select Car Leasing all receiving impressive customer scores and identical star ratings - making them all potential options if you’re interested in leasing a car independently. 

Customers were very impressed with the condition of the cars they leased, with all three companies scoring five stars out of five in this category. However, they were less enthusiastic about the efficiency of the process, with the companies scoring an average three stars out of five for the speed in which the cars took to arrive after ordering.

Car subscriptions

As a relatively new option in the car finance market, car subscriptions offer a new car for monthly payments without tying you down to a fixed-term lease agreement. While this means you'll get the latest cars with the minimum of fuss, it can also work out to be very expensive compared to other options.

Not all car brands offer a subscription service, but those that do include Nissan, Renault and Volvo.

Pros

  • Easily the most flexible car finance option
  • Deals as short as one month are available from some dealers
  • All incidental costs are usually included, so all you need to worry about is filling the car up at the petrol station

Cons

  • As everything is usually included, monthly payments are usually much more expensive than other finance options
  • Can prove very expensive if used long term

From online auctions to classified ads, discover the best place to buy a car


Independent car finance options

If your savings allow it, you might want to consider buying a car outright using cash - this way you won't be impacted by interest payments, long-term agreements and can sell the car whenever you like.

However, with car prices rocketing in recent years, buying with cash isn't usually a realistic option. If your savings won’t allow it, independent finance could be a way to make a one-off payment to a dealer.

Personal loan

An unsecured personal loan involves you borrowing the amount you need to pay for the car outright, then paying it back to your bank or lender.

Pros

  • No deposit or large up front payments
  • You immediately own the car from the outset, as you would when buying with cash
  • You have the choice to spread the loan over a time period of your choice
  • The loan isn’t secured against the car, meaning it’s not directly at risk of repossession

Cons

  • As is the case with paying by cash, you run the risk of the vehicle’s value depreciating heavily by the time you’ve fully paid off the loan
  • The APR (annual percentage rate) on the loan may be high
  • For a loan to cover the cost of a brand new car, you’ll need a good credit rating

0% credit card

A 0% credit card allows you to go a fixed amount of time (usually around two years) where no interest is charged on purchases.

Pros

  • One of the cheapest ways to borrow as long as you’re able to pay off the purchase during the 0% period
  • You immediately own the car from the outset, as you would when buying with cash or a personal loan

Cons

  • If you’re unable to pay it off before the end of the 0% period, the high interest rates you’ll pay afterwards may make the purchase very expensive
  • Not all car dealerships accept credit card payment or may charge extra fees
  • You may not get a big enough credit limit and you normally won’t know until you apply

Can you get car finance with bad credit?

Like any other loan or repayment scheme, dealers and lenders will often take your credit score into account when you apply for car finance. If your credit history isn’t good, lenders may not offer you the money for a car in fear of you missing payments, but that doesn’t make it impossible - as long as you’re willing to make adjustments.

You can potentially get car finance with bad credit by offering to pay more upfront. If you agree to pay a larger deposit from the outset, it gives you cheaper monthly payments and the lender more security in agreeing the deal. 

Another option is to choose a vehicle more in line with your budget (our new and used car reviews will help here, as will our guide to the best cheap cars). Try to pick out a car with payments you'll be able to keep on top of comfortably to assure yourself and the lender moving forward.

A lender may also be more likely to give you car finance if you have a guarantor, who will make payments if you’re not able to. To improve your chances of being granted credit in the future, it’s beneficial to start making steps to improve your credit rating.

While it’s usually not a quick process to transform your credit score, there are some easy steps available to get you on your way. Find out more in our guide on how to improve your credit score.

How to get the best car finance deal

In a time of falling margins, it’s no surprise that selling finance deals is important for car dealers. However, there's often room for negotiation. Follow our tips below to get the best deal possible.

  • Know the rate: Check how the APR compares between different payment plans you’re offered as well as the rate charged on a personal loan you could qualify for - keeping in mind different timeframes and extra fees for each.
  • Think long term: Consider the cost of the whole period of finance - while low monthly payments may be enticing, a longer repayment term could cost you more in the end.
  • Shop around: Do your research and find multiple quotes for your desired car, as different dealers may be able to offer you different finance plans.
  • Have a haggle: Armed with the above knowledge, you can now negotiate your APR, with reductions potentially saving you thousands over the course of the finance plan. Attempt to negotiate over ‘deposit contributions’ as well.
  • Take your time: Don’t be pressured into signing anything straight away: get all quotes in writing, and take them away to have a closer look at all the terms and conditions before you finalise the deal.

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