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Basically, car finance allows customers to purchase cars over a longer period of time, if they don’t have the cash to buy outright in one lump sum. 

It’s by far the most popular way to buy cars, with 93% of new cars paid for via monthly instalments.

There are several options open to you to finance used or new cars, with the main differences centring on how much you pay, for how long, and when (if at all) you own the car itself. 

Let’s take you through the four most common ways to finance a car… 

Personal Contract Purchase (PCP) 

A Personal Contract Purchase (PCP) allows you to pay low monthly payments to effectively hire a car for a fixed term (typically 24-36 months) – at the end of which you’re offered the chance to make a “balloon” payment to purchase it outright. 

Often you’ll need a deposit (somewhere around 10%), but that, alongside a mileage limit, can be negotiated between yourself and the dealer. 

The amount you’ll borrow is determined by the finance company’s prediction of how much the value of the car will drop over the term of the deal minus the deposit and with added interest. 

It’s a good option if you’re not able to pay a large lump sum in cash to buy a car in one go, but you will be paying interest on your monthly payments. 

The “balloon” payment is typically half the value of the car at the start of the agreement, although this varies. 

If you don’t make the balloon payment, you’ll return the car to the dealer, paying for any damage beyond reasonable wear and tear and for any miles over the mileage agreement. 

You’ll need certain information, documents and proof of ID for your PCP application to be assessed.

A good credit history is preferred, but not essential. 

Personal Contract Hire (PCH) 

The Personal Contract Hire (PCH) is remarkably similar to the PCP, but there’s no option to own the car outright at any stage.

If you go for the PCH option, you’re effectively renting a car over an extended period of time. 

Instead of a deposit, you’ll pay an “initial rental fee”, before paying monthly instalments with interest. 

At the end of the term, you simply return the vehicle, paying for any damage or over-mileage as with the PCP deal. 

There are a couple of problems with the PCH – namely that, as you don’t have the option to own the car at any stage, you aren’t covered by consumer law. 

That can make contract agreements quite inflexible.

You may also find the monthly payments for the same car with a PCP agreement may be cheaper – so it’s worth comparing quotes. 

But it’s ideal if you want to drive a new car every few years, with relatively low monthly payments and no worries about the vehicle’s resale value.

Once again, a good credit history is preferred, but not essential. 

Hire Purchase (HP) 

A Hire Purchase (or HP) is much more like your traditional loan – a deposit followed by monthly instalments.

Once you’ve finished making the payments, you’ll own the car.

This one’s even suitable for those with a bad credit score, as you can secure the car itself against the loan. 

It goes without saying that if you don’t think you’ll be able to make repayments, you absolutely should not be taking out any kind of loan. 

You’ll be paying interest on your loan and a down payment of around 10% of the car’s value is standard, although there is a bit of room for negotiation. 

PCP agreements typically have a fixed APR of between 5% and 10%, while HP agreements typically have higher rates – usually between 10% and 15%.

If you’re unsure what APR is, one of our previous Basically… features covers it here…

0% Finance 

This option does what it says on the tin – it lets you buy a car with monthly instalments without any interest added on top.

Ideal for anyone who’s happy to pay higher monthly rates over shorter periods, but crucially only wanting to pay the value of the car and not a penny more. 

For this, you’ll need an excellent credit score.  

To make things slightly more complicated, you can also have a PCP or PCH with 0% finance applied – meaning you’d pay no interest on those monthly repayments. 

Car subscriptions and personal loans

You can, of course, take out a personal loan to own the car outright from the get go, but that comes with its own set of risks – including potentially seeing the vehicle’s value depreciating heavily by the time you’ve fully paid off the loan.

There’s also the relatively new “car subscription” model offering a new car for monthly payments without a fixed-term lease agreement. 

This means you’ll be able to access the latest cars, but it can also work out to be very expensive compared with other options.

Read other entries in our Basically series…