Smiling couple buying a new auto at car showroom. salesman making handshake with young man purchasing new car with his wife

Which Type of UK Car Finance Agreement is Right for You?

When you consider car finance, what is the first agreement that springs to mind? It’s probably the most popular form of finance, which tends to be PCP.

For many UK drivers Personal Contract Purchase is the right choice but they may not also be aware of the other ways to finance a car!

Personal loans and hire purchase car finance are worth exploring before you commit to getting a car.

Car finance isn’t just one agreement, and your personal circumstances might make you more eligible for one form of finance over the others.

Let’s look at hire purchase, PCP, and personal loans in more detail to see which is best for you. 

Car keys on desk with man signing purchase documents in background. Closeup of black modern car keys while hand completes purchase documents.

What is Car Finance? 

Car finance is when a lender offers to give you money for a car purchase or pay for a car on your behalf and buy it from a dealer.

You will need to meet the eligibility criteria for car finance first and if accepted, you then make monthly payments, with interest back to the lender until the end of the agreed termination date.

You can choose how long you want to take your finance deal over, but drivers normally take them out over a couple of years.

You can tailor your finance deal to suit your monthly budget by increasing or decreasing the loan term and usually your payments will be fixed throughout. 

Using a Personal Loan to Buy a Car

A personal loan can be used to buy anything you want, and it can be used to buy a car.

A personal loan is when you ask a lender to borrow you a set amount of money and if accepted, the money gets deposited straight into your bank account.

You can then use the money to buy a car within your budget just as if you were buying a car with cash.

You aren’t restricted to where you buy your car from either and you can buy from a dealership or a private seller.

You also own the car outright and can modify it as you like and sell it when you’re ready.

You make monthly payments, with interest back to the finance lender until the end of the agreed term.

If you do choose to sell the car before the loan term has ended, you will need to continue to meet the repayments as it’s not a fixed loan. 

Who is a personal loan for?

If you’re considering a personal loan to buy a car, they tend to be best suited to those with excellent credit scores and a strong credit history.

Personal loans can benefit from low interest rates which makes finance cheaper, but they are only offered to applicants who have better credit and may not be accessible to bad credit applicants.

They are also good for people who want to own the car outright and have more control over the vehicle they are driving. 

Getting Personal Contract Purchase car finance

PCP car finance is one of the most flexible ways to get a car. PCP finance can be offered by car dealers and lenders and can be the most beneficial to new car buyers.

It is a form of secured loan which means the lender buys the car on your behalf from the dealer, and they own the car throughout the agreement.

PCP deals can offer low monthly payments, even on brand-new cars as you only finance part of the cost of the car.

If you wish to take ownership of the car at the end of the deal, you will need to pay the large balloon payment which has absorbed much of the loan value in the deal.

You can also choose to hand the car back to the dealer or use any positive equity in the dealer towards a new car with a new PCP agreement.

PCP deals require the driver to set an agreed annual mileage at the start of the agreement and to agree to keep the car in good condition.

If not, you can incur additional charges at the end of the deal. 

Which drivers do PCP deals suit? 

PCP car finance deals can be best suited to drivers who aren’t precious about owning the car they are driving.

The final balloon payment needs to be paid to take ownership of the car and often, this can be thousands of pounds to pay, making it unrealistic for many drivers.

Drivers who like to change their car more regularly can benefit from the flexibility that PCP financing offers.

PCP deals can be offered to bad credit applicants, but they can be cheaper for those with better credit situations. 

Should you choose hire purchase car finance? 

Another form of secured loan, where the lender owns the car throughout the agreement is hire purchase car finance.

Hire purchase has a much simpler structure than PCP and it’s really easy to understand.

If you’re accepted for a hire purchase car finance deal, the lender will buy the car you want to finance from a dealer.

You then split the value of the chosen car into equal monthly payments, usually with interest over the agreed term.

Once the term has ended, you have paid off the car and there is a small option to purchase fee to pay before you can take ownership of the car.

The option to purchase fee is usually similar to what you have been paying each month and once paid, the car is yours to keep! 

Who is hire purchase suitable for?

Typically, hire purchases can be the most bad-credit-friendly option for drivers.

It’s a secured loan which means if you fail to keep up with repayments, the lender has the right to take the car away from you.

This should not be taken lightly though, and you should only enter into a finance agreement that you can afford to pay back on time and in full.