Some new car buyers may find finance options better suit their needs than traditional cash purchases. To help you understand the world of car finance a little better, we’ve put together a guide that explains the different options available, how they differ and their respective pros and cons.
Types of car finance
There are four main finance types that offer an alternative to buying a new car with cash.
If you choose to buy a car using any of these options, the specific terms of your contract will have to be agreed between you and either the dealer or a bank. You may be required to put down an initial deposit and must be prepared to make all subsequent monthly payments. If these finance options aren’t suited to you, traditional cash payment will always be available.
Personal Contract Purchase (PCP)
A PCP finance agreement could help 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 but your dealer will give you the option to buy it outright in return for a final 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).
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 will face a similar penalty, too.
- Monthly payments are usually less than HP agreements
- The deposit amount can be flexible
- You can choose the agreement length (usually from 12-48 months)
- You’ve no obligation to keep the car after your agreement ends
- Some agreements can be paid off early (you’ll have to agree these terms with your dealer)
- If the car exceeds ‘normal wear and tear’ you’ll have to pay a penalty fee
- If you exceed the mileage agreed you have to pay an extra cost per mile at a rate agreed in your contract
For more information, read our dedicated PCP car finance guide.
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 installments 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.
- You can choose the agreement length (usually 12-60 months)
- There aren’t any fines for wear and tear
- There’s no mileage limit
- You don’t own the car until the final payment
- Can be more expensive than a normal bank loan
- HP finance can be more expensive than PCP finance for short-term agreements
For more information, read our Hire Purchase car finance guide.
Leasing (Personal Contract Hire)
Leasing a new car is similar to hiring a car on holiday. Instead of returning it full of sand and covered in filth after a week or two, a lease agreement means you’ll be able to keep hold of a brand new car for a number of years.
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 usually costs the same as three monthly payments.
Once your finance term is complete you won’t own the car, nor will you be given the opportunity to buy it outright.
- Fixed cost motoring
- No depreciation risk
- Maintenance payments can push up costs
- You cannot keep the car when your contract ends
- A large deposit is often needed
- Your mileage will be limited
- There may be penalties for excess wear and tear
For more information, read our car leasing guide.
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 arrangments 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.
As with other finance options, you’ll have to careful consider whether you can afford the monthly repayments before you sign a contract – your car may be repossessed if you miss multiple installments.
- Can be arranged over phone
- Competitive fixed interest rates
- You’ll own the car from the beginning of your contract
- Can affect your ability to borrow more
- You’ll need a good credit rating
- Interest must be paid off before you start paying for the car
- Banks have varying loan rates – you’ll have to shop around to find the best deal
Frequently asked questions about finance
Can every dealer on carwow provide finance offers?
All the 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 your car and how many miles you’d like to cover.
Can I take advantage of manufacturer offers when I buy a car through carwow
On some models, manufacturers may offer further discounts in the form of deposit contributions and low interest rates. Any carwow finance offer you receive will be calculated with any available deposit contribution included. Extra discounts – including manufacturer loyalty schemes – can, however, be added to your existing offer.
Do all manufacturers offer finance deals on their cars?
Yes. All manufacturers provide ways to finance their cars if you’ve decided paying in cash is not 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 new car
If you’ve picked your perfect new car, use our car deals page to view the latest carwow offers or check out our PCP calculator to get a better idea of how much it could cost per month. Not sure what to buy? Let our car chooser tool narrow down your search.