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Car Finance Explained

For most people, a car is the second-most expensive thing that they will buy after a house.

And more people than ever are buying new cars on finance, attracted by the option to pay monthly and change their car every few years.

While most of us might have once had to settle for an old banger because it was all we could afford, todays finance deals mean that getting into a new car is more accessible than ever.

There are pros and cons, though, versus buying outright.

Here we look at the different types of finance on offer to help you decide which is right for you.

If you’re looking for a new car visit www.exchangeandmart.co.uk/new-cars and www.s1cars.com/new-cars


These types of deals are hugely popular and it’s not hard to see why – it’s an easy way to drive away a new car if you can’t afford to buy one outright.

This is basically a long-term rental - you make fixed monthly payments to use the car until the contract expires.

There are two types, known as personal contract hire (PCH) and personal contract purchase (PCP).

The payments are generally lower than other types of finances, but there’s often a mileage restriction – you pay a one-off charge at the end if you exceed it.

The difference between the two is that with PCH you simply hand the car back at the end of the term.

With PCP there is the option of buying the car by making a final ‘balloon payment’.

If you don’t do that you can simply hand the car back, or negotiate another deal for a new one.

There’s no denying that this is an easy way to drive a new car – with few maintenance costs to pay while you have it – and it means you can switch cars every few years.

Personal loan

This is arguably more simple than PCP, but less flexible.

While PCP agreements can have lower monthly payments over a shorter amount of time because you often won’t be paying for the full value of the car, with a personal loan you will.

These are straightforward loans with a bank where you borrow the amount of money you need for your car and pay it back monthly, usually over several years.

The plus point here is that you will own the car because you will be buying it outright with the money lent to you.

But, because you are borrowing all of the money needed for that car, your monthly repayments are going to be higher, and probably over a longer period of time, than if you did hire purchase.

The total amount, however, would be lower overall.

Personal loans usually offer the lowest interest rates, but any issues with your credit score could make it difficult to get one.

Hire purchase

This doesn’t happen much these days because of the popularity of leasing deals, but it’s pretty straightforward.

There will be a deposit, often around 10 per cent of the car’s value, and you make fixed monthly payments until the full value of the car is paid off.

At that point, you own the car, simple as that.

This could be a good option if you have a certain amount of money saved up to put down as a deposit but don’t have enough to buy outright.

Credit card

One advantage to using a credit card is that you’ll have extra protection on the full purchase cost of the car, as long as you pay at least £100 of it by card and meet your monthly card payments.

The drawbacks are that credit card interest rates will be higher – often much higher – than the rates for personal loans, hire purchase, or lease deals. Make sure you compare like-for-like APR.

If, however, you have a 0% or low interest rate offer on the card it could work out nicely if you can afford to repay it before the offer ends.

Finally, some dealers will charge a credit fee, often around 3%, which will add to the cost.


It’s pure and simple, this one. If you have the money, buy it outright. There will be no interest rates, final payments or extra fees.

The only negative is that you won’t get the same protection that you get when buying with a credit card.

So, which one is best?

It’s all about personal circumstances – how much money you have to spend both up front and on a monthly basis, how long you want the car for and whether you want to own it or change it every few years. Remember taking out any kind of finance can affect your credit rating and have other implications if you fail to keep up the payments. Make sure you are making an informed decision before agreeing any deals.

Hopefully we’ve made it easier for you to decide.

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