Your Car Loan Options Explained

There are several financing options available for buying a car in the UK. These options can either be financing taken through a dealer or independent financing taken directly from a financing agency.

Dealer-based finance options:

  • Hire Purchase (HP)
  • Car Leasing
  • Personal Contract Plan (PCP)

Independent finance options:

  • Personal Loan
  • Credit Card

Understanding Car Loan Options

Like most finance packages, it is important to understand the different options before you can truly understand which loan type is appropriate for you. Let's look at each of the finance methods in detail and put some numbers to illustrate the cost of each of the finance solutions.

Hire Purchase (HP)

Under HP, the owner buys a vehicle on installments spread over periods of 12-60 months. Typically, the owner has to pay a deposit (around 10%) on the original amount. You repay the remaining portion (original price - deposit) in equal monthly installments, which include interest. This method is widely used in case of new cars. The limitation of this method is you don't own the vehicle till the contract term comes to an end. The first payment may include an 'administration fee' of say £100, and the final installment may include an 'option to purchase' charge. Typically APRs for HP are between 7-13%.

Example: Let's look at the Audi Q3 Diesel Estate worth £23,600. Under HP, this Audi will be available for a monthly payment of £560.36 for 48 months at an APR of 9.9%. There will be a deposit of £1,000, an admin fee of £185, and the option to purchase fee of £149. You won't own the vehicle until the end of the term or until you make the entire payment of £23,600.

This is just one example of a HP Finance Calculation on a car loan. You can use our free HP Car Loan Calculator to create your own HP Car Loan calculations

Car Leasing

Like the name suggests, the owner leases a car with a fixed monthly installments in the range of £100 and £400 each month. The choice of vehicle, duration of the lease, and expected annual mileage determine the monthly payments. Under certain schemes, the monthly payments can also include maintenance. You will have to pay a deposit, which is a few months rent (between 3-6 months) in advance. Also, you will have to get a comprehensive insurance, which can be expensive for high-end cars.

Example: Take the example of the same car as above (Audi Q3 Diesel Estate). Under car leasing, the monthly installment will be much lower at around £294 per month for 48 months. This amount will include road tax, but not maintenance (so any maintenance has to be incurred by the leaseholder.) The deposit will be 6 months installment in advance at £1764. The key difference is that you don't get to own the vehicle at all; you return it at the end of the term. Also, this monthly amount is subject to a mileage of only 8,000 in a year. If the mileage exceeds this amount, the monthly charges will go up!! Many get caught out on this caveat, ensure you fully read and understand the finance terms and conditions.

Personal Contract Plan

PCP or Personal Contract Plan is a combination of hire purchase and car leasing. It has features of HP such as the right to own the vehicle at the end of the term, deposit amount in the beginning, etc. However, in comparison to HP, PCP offers lower monthly payments but higher overall cost. That's because the vehicle's total cost does not determine the monthly payments. Instead, these payments are based only the difference between the purchase price and its residual value (GMFV) after depreciation at the end of the contract. Also, the final settlement amount is higher as compared to HP. PCP is also similar to car leasing such that the monthly payment is decided by mileage, cost of car, and duration of the contract. However, the monthly payment includes an option to own the car upon payment of a pre-decided amount.

PCP is available at an APR in the range of 4.3% to 14%. PCP finance is available for the duration of 12-60 months.

Example: Under PCP, the monthly installment on the Audi mentioned above will be £358.90 (lower than HP, but higher than car lease.) Like HP, the deposit will be £1,000, an admin fee of £185, and the option to purchase fee of £149. But unlike HP, you won't own the vehicle at the end of the 48-week term. You will have to pay £11,945.35 as extra, which is the residual value. And similar to lease, the monthly payment is subject to an annual mileage limit of 10,000 in a year.

This is just one example of PCP finance. You can use our free PCP Calculator to create your own PCP car finance calculations

Independent Finance Options

Personal Loan

Personal loan is the most inexpensive way to purchase a car. However, personal loan is dependent on your credit rating. You may not be eligible for a personal loan if you have e a low credit score. It is best to avoid securing the personal loan against any other asset, such as home, to avoid risking the asset. APRs for personal loans are in the range of 5.7-12%, and repayment periods are between 1-7 years. Also, there could be a penalty if you repay the loan earlier. So to buy the Audi above through a personal loan, you'll end up paying a monthly installment of £543/month. This method is very similar to Hire Purchase, except there is no Option to Purchase fees, and no deposit.

You can calculate the cost of a buying a car with a personal loan using the Personal Loan Calculator.

Credit Card

The option is available to people with good credit ratings. It is an expensive option with APR in the range of 14.5% and 19%. Subject to credit rating, this option is available like any other credit card transaction. However, credit cards may not be accepted by all dealers.

Which option is the best?

Among all the options listed above, PCP is the most widely used method. However, you need to determine the most suited option based on your financial situation. Irrespective of the method, the key factor to remember is that before taking a decision, you should compare all deals. You should understand the hidden costs and figure out the total repayment amount under each method.