Everything you need to know about car finance

If you’re buying a new car, you need to think about how you’re going to pay for it. There are plenty of options to choose from but it’s important you know all the possibilities before committing to anything.

While many people go for the finance options recommended by the dealer, it’s best to shop around so you can make sure you’re getting the best deal available to you.

Just like you need to consider running, maintenance and insurance costs when choosing your car, you need to consider monthly repayment amounts, interest rates and additional payments when deciding how to pay for your car.

You need to understand how and when you’ll pay, the positives and negatives of each potential option and whether you could save money by choosing something different to what you might be leaning towards. We’ve put together some of the pros and cons of some of the most popular ways to pay for a car – but remember, you should pick the one that’s right for you.

Cash

Paying out a large sum of money isn’t possible for everyone, but paying for your car in full on the day you buy it could be the best option if you can afford it.

Pros:

1. You’ll own the car outright, so you can sell it whenever you want
2. You won’t be paying interest, which could save you thousands of pounds
3. You won’t have to worry about making monthly repayments if your circumstances change

Cons:

1. Paying out a large amount of money is impossible for many people
2. Paying by cash often means you have to save for a while, making it difficult to buy a new car if you need one urgently

Personal Contract Purchase (PCP)

Personal Contract Purchase (PCP) is a popular way of financing a car. With a PCP deal you don’t make repayments on the full value of the car, which can mean the monthly repayments are lower than some of the other options.

However, at the end of the finance you’ll be left with a large payment known as the guaranteed future value (GFV) or balloon payment, and an ‘option to purchase’ fee to pay if you want to own the car. Or, you can return the car. The GFV or balloon payment is the amount of the vehicle value that the finance lender off-sets to the end of the finance term, based on its anticipated age and mileage.

Although you’ll be the registered keeper, you won’t technically own the car – you’ll be hiring it from the company you got the PCP deal from. At the end of the agreement, you’ll have three options:

1. To pay the ‘balloon payment’ and ‘option to purchase’ fee which means you’ll own the car
2. Hand the car back and pay any outstanding charges
3. To trade your car in and take out another car on finance

PCP is mostly offered on brand new cars, but is available for used cars too depending on the age of the car. Admiral Car Finance only offers PCP on nearly-new and used cars.

Pros:

1. There’s usually a lower monthly payment cost because of the balloon payment at the end 
2. PCPs are attractive to people who want flexibility as you can usually trade in your car as deposit – full or partial – on another car every couple of years

Cons:

1. Because you’re essentially borrowing the car throughout the duration of the agreement, you need to make sure you’re not adding to its depreciation unnecessarily. The number of miles you think you’ll do can affect the cost of your PCP deal as it affects the final value of the car, so you agree and set an annual mileage limit as part of the contract with the lender. If you end up doing more miles than you agreed, you’ll be charged for the additional mileage when you return the car.
2. You must pay for any damage to the car at the end of your contract
3. If you decide to keep the car, the balloon payment may be quite a lot of money to pay out at once.
4. If you hand the car back but there is no equity left in the car you may need to find another deposit for your next car
5. As the loan is secured against the car, the vehicle could be repossessed if you don’t keep up the payments
6. It’s likely that you’ll have to put a deposit down to get a PCP deal

Hire Purchase (HP)

Hire Purchase means you hire the car for a period of time by paying monthly instalments. Although you’ll be the registered keeper of the car, you won’t own the car until you’ve paid your final monthly instalment, and an ‘option to purchase’ fee.

With Hire Purchase you normally have to put down a deposit – usually at least 10% – and pay off the remaining amount as a fixed monthly payment over an agreed period of time.

Pros:

1. You’re not constrained by agreed mileage like you are with PCP
2. As there’s no balloon payment at the end, you can keep your car without forking out a large sum of money

Cons:

1. The monthly payments are often higher than a PCP deal
2. Like PCP, it’s likely that you’ll have to put a deposit down
3. Just like PCP, the loan is secured against the car so your vehicle could be repossessed if you fall behind with payments

Personal Contract Hire (PCH)

A Personal Contract Hire agreement, commonly known as leasing, is basically a long-term rental. Unlike PCP and HP finance, you don’t get the option of keeping the car at the end of your contract.

Maintenance costs are often included, but you might have to put down a large ‘initial rental’ that you won’t get back, like a deposit. MOT, insurance and tax can also be included in the payment which makes things easier but can mean you have a more expensive monthly repayment.

Pros:

1. Potentially the cheapest option over time due to not having any unexpected maintenance costs
2. Provides the most flexibility. You’re not tied to a car, as you don’t own it. You can change your car every few years without worrying about its re-sale value
3. Many companies offer an option that includes maintenance, so you won’t have any repair bills sneaking up on you

Cons:

1. You’re only paying to borrow the car – you’ll never own it. If you’re looking for a long-term vehicle, or car ownership, this probably isn’t the option for you
2. You don’t have the option to trade in your car early – you’re tied in until the contract ends
3. As with PCP, you must agree to an annual mileage allowance, and you’ll have to pay for any extra miles you do

Personal Loan

Taking out an unsecured personal loan to buy your car could be a cost-effective way to fund your exciting new purchase, depending on the cost of your car, as you may find that you can get lower interest rates. Bear in mind that most personal loans are limited to a maximum of £25,000.

If you don’t have a good credit score, you may find yourself unable to access the more competitive APRs on personal loans. Factors that affect this include:

• Income
• Credit history
• Affordability criteria

Pros:

1. Depending on your credit history, the interest rates could be lower than on PCP and HP which means your monthly payments, and total amount repayable will be lower
2. You’ll own the car immediately and you can sell it whenever you want
3. You won’t have to return the car or pay a balloon payment at the end of your repayments
4. You can use a personal loan to buy a car from a private seller, where PCP and HP are only available if you’re buying a car from a dealership
5. You could take out a personal loan before you find the actual car you want to buy, so you have the funds ready to go and a better chance of securing the car

Cons:

1. If you’ve got a bad, or limited, credit history, the interest rates you’re offered might make this a more expensive option. The APR advertised only needs to be true for 51% of customers, so you could end up paying more than advertised. You’ll need to make sure you know exactly how much interest you’re paying and be sure you can afford it.

Credit Card

Depending on the cost of the car, a 0% credit card could be one of the more cost-effective options. This gives you extra protection if something goes wrong, as long as you pay at least £100 of it by card and meet your monthly card payments. 

The 0% offer is usually for a limited time, so as well as factoring in if you can meet the minimum monthly payment amount needed, you’ll need to be able to pay the full amount off by the time the 0% offer runs out or you’ll find yourself paying much higher rates of interest.

Remember that you might not be able to access some of the best credit card deals unless you have a good credit score.

Pros:

1. There are plenty of 0% credit cards available for people with good credit scores. This means you’re only paying the cost of the car, with no added interest
2. Purchases made on credit cards tend to have extra protection if something goes wrong

Cons:

1. If you have a 0% credit card, it’s important to bear in mind the 0% offer is often limited. You should make sure you clear the debt before you end up paying interest
2. Not keeping up with your payments could mean you’ll incur charges and it could affect your credit score for future credit
3. Credit cards tend to have a limit of less than £5,000, so this option only works if you’re buying a cheaper car

Can I afford car finance?

This is the most important consideration to make, and something you must be happy with before signing on the dotted line. Make sure the loan or finance option is affordable for you, and that you can still afford all your other existing commitments and essentials like your mortgage, bills and cost of living. Think about whether your financial circumstances may change in the future, and whether you’ll be able to afford the repayments then.

If you’re worried you might be getting into financial difficulties, contact Citizens Advice – they’ll be able to give you the right advice for your circumstances.

Visit Admiral Car Finance and use our car finance calculator to find out more.