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Car finance explained – complete guide

More and more buyers are choosing finance to fund their dream cars. There are several types of car finance, each with their pros and cons – read on to work out which is right for you.

All types of finance aim to help you drive your dream car without needing a cash lump sum to pay for it upfront. The most widely recognised and popular option is personal contract purchase (PCP), but other finance methods such as hire purchase (HP) and leasing are steadily gaining popularity. There’s also the option of getting a bank loan to cover the costs. Like any finance package, you should carefully consider whether you can afford the repayments – a cash price will always be available and might suit your circumstances better.

What car finance options should you consider and how do they compare?

Things to consider PCP HP Leasing Bank loan
Deposit required
Fixed monthly payments
Mileage caps
Fines for excess wear and tear
Depreciation risk
Own the car outright
Balloon payment at the end
Early redemption charges
Secured against an asset

Read on for more information on each type of car finance…

Personal Contract Purchase (PCP)

A PCP finance agreement lets you park a new car on your drive in return for an initial deposit and a series of monthly payments. At the end of your agreement, you won’t own the car and simply hand it back to the dealer provided it’s in good condition. If you decide you want to keep the car, you have the option to buy it outright in return for a final payment – sometimes called a ‘balloon’ payment. This amount can be financed separately if you can’t afford to pay it in one go.

This price – and the amount you pay monthly – will depend on the size of the deposit, the cost of the car, the interest rate and how much the dealer expects to be able to sell the car on for when your agreement ends. This amount is often referred to as the Guaranteed Minimum Future Value (GMFV) – it’s what the car is expected to be worth after your finance period ends.

A PCP contract will usually set out the condition the dealer expects the car to be in when it’s returned and how many miles you’ll be allowed to cover. Any big bumps and scrapes – beyond usual wear and tear – could mean you’ll have to pay a fine once your contract ends. Return the car with too many miles on the clock and you’ll face a similar penalty, too. It’s important to read your contract agreement thoroughly – all these terms and conditions will be outlined.

PCP finance – pros and cons
+ Monthly payments are usually lower than HP – You don’t own the car after paying all your monthly payments
+ The deposit amount can be flexible – You’ll pay for any excess mileage beyond your contracted amount
+ You can choose the length (usually 24-48 months)  – You’ll pay extra if the car exceeds normal wear and tear
+ You’ve no obligation to keep the car at the end
+ Can be paid off early (you’ll have to agree terms with the dealer)

For more information, read our dedicated PCP car finance guide.

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Hire Purchase (HP)

Taking out a Hire Purchase (HP) finance agreement is similar to taking out a mortgage on a house. After you’ve paid an initial deposit, a finance company will loan you the rest of the money for a new car – you’ll pay this back in monthly instalments over an agreed period. The deposit size and monthly payment amount will be determined by the cost of the car, the interest rate (APR) and the length of your agreement.

Unlike PCP finance, there’ll be no large optional final payments because once you’ve paid off the agreement, you’ll own the car outright. As a result, HP agreements don’t include any terms and conditions regarding mileage or wear and tear.

HP finance – pros and cons
+ You own the car at the end of the agreement – You won’t own the car until the final payment
+ You can choose the length (usually 12-60 months) – Can be more expensive than a normal bank loan
+ There are no fines for wear and tear – Monthly payments can be higher than PCP agreement
+ There’s no mileage limit

For more information, read our Hire Purchase car finance guide.

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Leasing (Personal Contract Hire)

Leasing a new car is similar to hiring a car on holiday. You pay a sum upfront then regular monthly payments, then hand the car back. Instead of returning it full of sand and covered in filth after a week or two, however, a lease agreement means you’ll be able to keep hold of a brand new car for a number of years – it’s effectively long-term car rental. Once your term is complete you won’t own the car, nor will you be given the opportunity to buy it outright.
You’ll have to sign a contract with the lease provider that’ll determine how many miles you can cover and the size of your monthly payments. As with other financing options, you’ll have to pay an initial rental (similar to a deposit) but, unlike PCP or HP agreements, this tends to be less flexible and is usually calculated as a multiple of three, six or nine monthly payments. Many leasing companies will let you add servicing plans to your agreement – do this and your services, tyres and other consumables will effectively be paid for. Adding such maintenance plans will likely increase your monthly payments.

PCH leasing – pros and cons
+ Fixed-cost motoring – Maintenance payments can push costs up
+ No depreciation risk – You can’t keep the car once the agreement ends
– A relatively large deposit is often needed
– Your mileage is limited
– Penalties for excess wear and tear

For more information, read our car leasing guide.

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Bank loan

A bank loan could help you get behind the wheel of a new car with, possibly, fewer strings attached than a PCP or lease deal. If you’re willing to sort the finance arrangements yourself, a traditional loan could help you park a brand new car on your drive without worrying about returning it after several years or limiting your mileage. Using a bank loan means you own the car outright from the start, so you can easily sell it whenever you like without having to leave a finance agreement.

As with other finance options, you’ll have to careful consider whether you can afford the monthly repayments before you sign a contract.

Bank loan – pros and cons
+ You’ll own the car from the beginning of the contract – Can affect your ability to borrow more
+ Competitive fixed interest rates – You need a good credit rating
+ Can be arranged over the phone – You often have to pay off the interest before you can pay for the car
+ You can easily sell the car whenever you like – Banks’ loan rates vary – you’ll have to shop around for the best deal

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Car finance FAQs

Can every dealer on carwow provide finance offers?

All dealers on carwow are official UK main dealers. As a result, they can all provide manufacturer-backed finance offers. They’ll be happy to give you a personalised quote depending on what size deposit you’d like to pay, how long you’d like to keep the car and how many miles you’d like to cover.

Can I take advantage of manufacturer offers when I buy a car through carwow?

Yes. On some models, manufacturers may offer further discounts in the form of deposit contributions and low interest rates. Any finance offer you receive from carwow will show applicable finance deposit contributions and APR interest rates. Extra discounts, including manufacturer loyalty schemes, can be added to your existing offer.

Do all manufacturers offer finance packages on their cars?

Yes. All manufacturers provide ways to finance their cars if you’ve decided paying in cash isn’t for you. Specific terms will have to be agreed between you and a dealer, however.

I own my own business – can I take advantage of business rates through carwow?

Yes. When you receive finance offers through carwow, it’s worth notifying the dealers if you’re a business owner or a sole trader – you may be offered different funding options to a private buyer.

Is there anything else I should look out for?

Some dealers may also offer sizeable discounts that are, in fact, manufacturer finance incentives – available from any main dealer. If you buy a new car through carwow, you’ll be able to take advantage of both manufacturer deals and individual dealer offers.

Save money on your next car

Already know what car you want? Click ‘login’ on our homepage to sign up, configure your ideal model and, when your offers arrive, contact your preferred dealer to discuss your finance options. We also have a range of new, nearly new, pre-reg and ex-demo cars ready to be driven away today.

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