Over the year, FLA lenders distributed more than £37 billion in car finance loans, helping Brits get behind the wheels of everything from the latest Teslas to second-hand Minis.

Of course, like any loan it’s important to have a good understanding of exactly what you’re committing to when taking out car finance. This means taking the time to understand the advantages and disadvantages of financing a car. Want to know more? Read on as we answer all your questions about the advantages and disadvantages of financing a car, with a goal to help you make educated decisions.

Advantages of financing a car

• You can stretch your budget further

When considering the advantages and disadvantages of financing a car, budget is one of the biggest factors. Instead of scraping together cash to purchase a car outright, car finance options such as PCP and PCH allow you to stretch your budget much further. Initial deposits can be as low as 10% (with plenty of no-deposit options too) and allow you to spread out the rest of your loan over a period of two to four years, sometimes longer.

• Fixed monthly payments

Most car finance loans include fixed monthly payments which make budgeting easy. You’ll know exactly how much will be coming out your bank account each month, making it easy to stay on top of your loan.

• Options for every credit score

Unlike mortgages and credit cards, car finance is available to most Brits. Even if your credit score is less than ideal, it’s still possible to secure loans with great terms, conditions, and interest rates. Find out more in our complete guide to car finance with a poor credit rating.

Disadvantages of financing a car

• You may be subject to mileage limits

Car finance loans often include mileage caps which can restrict how you use your car. These are common with PCP agreements, where you have the option to return the car to the lender at the end of the loan. If you want total freedom when it comes to mileage, car finance options like hire purchase (HP) can be a good alternative.

• You don’t necessarily own the car outright

Many car finance loans use the vehicle as security, meaning you don’t own the car outright until you’ve paid all instalments. You may also need to settle extra costs such as balloon payments or penalties for extra mileage. For many motorists, this is one of the biggest disadvantages of financing a car.

• Excess wear and tear can result in penalties

As well as penalties for exceeding your mileage limit, some car finance loans will add fees for wear and tear. Everyday wear and tear is fine but anything abnormal can incur fees. This can include anything from dents and scratches to ripped seat covers.

Tips for securing the best type of car finance

No matter what type of car you’re in the market for or the state of your finances, it’s important to understand a few key points when researching the advantages and disadvantages of financing a car.

APR

First, you’ll need to understand annual percentage rate (APR). This is the interest rate you’ll pay over the lifetime of the loan. APR can vary significantly between lenders and is also impacted by factors like your credit score and deposit. Without a good rate, APR can be one of the biggest disadvantages of financing a car. That’s why it’s so important to shop around for the best deals!

Hidden fees

As a borrower, it’s your responsibility to gain a complete understanding of all fees and charges associated with your loan. Most lenders are relatively transparent, but it always pays to ask questions and do your homework. This is the best way to sign on the dotted line with confidence and ensure you don’t encounter any unwelcome surprises down the line.

Keep the big picture in mind

Rock bottom interest rates and ultra-low monthly payments are tempting but it’s important to keep the big picture in mind when it comes to car finance. Use variables like APR and repayment terms to calculate the total cost of your loan and paint a long-term picture of the advantages and disadvantages of financing a car. Generally, longer loans mean you’ll rack up more interest and ultimately, pay more for your car.

Ask for extras

If you don’t ask, you don’t get! For example, it’s not unusual for dealers to throw in free servicing for 12 months or extras like leather seats, roof racks or an upgraded sound system when selling new cars. Similarly, just because you’re purchasing a car on finance doesn’t mean you can’t push for a discount on the advertised price of the car. Of course, there are no guarantees but if you approach the situation with a smile and a good attitude, chances are it’ll pay off.

Enlist the help of a broker

There’s no shortage of car finance lenders in the UK and like all industries, some are legions better than others. Enlisting the help of a broker can help you sift through the options and secure the best deals.

With access to the largest panel of car finance lenders in the UK, My Car Credit matches you with the best loan based on your unique borrower profile. This personalised approach boosts your chances of success and helps secure you the best type of car finance. Connecting with a broker can also help you understand more about the advantages and disadvantages of financing a car and ultimately, make better choices.

Want to know more about the advantages and disadvantages of financing a car? We’re always available to answer questions via email or give us a call on 01246 458 810 to chat with one of our car credit advisors.

1. Hire Purchase to Own a Car Outright

Hire purchase (HP) is one of the simplest UK car finance types.

What happens with hire purchase?

HP allows you to spread the cost of the vehicle over a set period of time, with repayments usually made monthly. At the end of the hire purchase agreement, you’ll own the car outright, with nothing more to pay. Deposits aren’t always required, though they can help reduce your interest rate and monthly payments.

Hire purchase costs and terms

To calculate the total cost of your hire purchase agreement, simply take the price of the car, minus the deposit and add interest. You may also be liable for administration and transfer rights fees at the end of the loan, which are worth factoring in. Most hire purchase agreements span for between three to five years, although this can vary. Monthly payments are fixed, making it easy to budget and plan around your loan.

2. Conditional Sale Car Finance Agreement

Similar to a HP agreement, conditional sale loans are a great option if you want to own your car outright at the end of the contract.

What to expect from a conditional sale

Fixed monthly payments are a little higher though there are no additional fees at the end of the agreement. Deposits are usually 10% of the car’s value and repayment terms can be anywhere from two to six years, allowing for plenty of flexibility for a brand-new car.

Conditional sale vs hire purchase

What’s the difference between hire purchase (HP) and a conditional sale? Sometimes, the terms are used interchangeably. However, conditional sales specifically include a condition that you don’t own the vehicle until the final instalment has been paid. That means your lender can repossess your car if you fall behind with payments. This condition may also be included on HP car finance agreements though.

3. Personal Contract Purchase

Personal contract purchase (PCP) is one of the most popular types of UK car finance options and for good reason.

Understanding personal contract purchase

Fixed monthly repayments are lower than HP loans, which allows you to consider newer, higher-spec vehicles without blowing the budget. You may need to make an initial deposit worth around 10% of the car’s value, and then you’ll continue to make repayments over the lifetime of the loan, usually between two and four years.

Balloon payments on PCP deals

When you’ve made your final instalment, you have the option to make a ‘balloon payment’ to gain ownership of the vehicle. The balloon payment is a final payment which covers the minimum future value of the car at the end of the PCP agreement. Another way of looking at it is that your monthly payments cover the car’s depreciation in value, while the final balloon payment covers the actual cost of the vehicle.

Alternatively, you can opt out of the large, lump sum payment. This will end your personal contract purchase (PCP) agreement, so you’re free to find a car elsewhere. However, you can also start a new PCP deal and swap the car for a new model, making PCP loans popular with motorists who like to change cars for the latest bells and whistles.

Guaranteed Future Value explained

Most PCP loans require you to estimate your expected annual mileage, which is used to calculate Guaranteed Future Value (GFV). This figure predicts the value of the car at the end of the loan based on a maximum annual mileage allowance. Without a mileage limit, it’s hard to predict how a car loses value as the same car would be worth a significantly different amount if it has been driven 50,000 miles or 15,000 miles, for example. As such, if you go over your pre-agreed mileage limit you may incur penalty charges as this reduces the guaranteed minimum future value.

4. Personal Loan

Few major purchases cost as much as a car, so it’s no surprise that a personal loan is another option to cover your payment to a car dealer or private seller.

Getting a personal loan to finance a car

Personal loans see you borrow the total amount needed to purchase a car, then pay back a fixed amount in monthly instalments. You’ll also have to pay interest on the amount borrowed, based on an annual percentage rate.

Advantages of a personal loan

You’ll own the vehicle outright, which makes a personal loan appealing to motorists who want complete freedom when it comes to mileage, wear and tear, customisation and other liberties. You’re also free to sell the car at any time with a personal loan. Borrowers with good credit profiles can generally unlock the best interest rates and personal loan terms.

5. Guarantor Loan

For borrowers with a bad credit history, guarantor loans are one of the most appealing car finance types in the UK.

How guarantor loans work

A third party, usually a family member, agrees to ‘guarantee’ the personal loan or car finance with a bank, finance company or car dealership and step up if you can’t make monthly payments. It’s a big responsibility for both you and the guarantor and so shouldn’t be entered into lightly.

How does it differ from a personal loan?

This carries many of the same benefits as a personal loan, depending on who you’re borrowing from. A guarantor loan from a bank means the vehicle is fully paid, so you can make customisations or even sell it if needed. Bear in mind that your guarantor’s credit rating may also come into play when applying for this type of personal loan or finance.

6. Personal Contract Hire (PCH)

Also known as leasing or a lease agreement, personal contract hire allows you to rent a vehicle for the lifetime of the agreement.

How does personal contract hire work?

Contracts start with an initial cash deposit followed by low monthly payments to cover the cost of the lease. The value of your monthly payments is determined using your expected annual mileage and the length of your lease. This is because both variables play a big role in the value of the vehicle at the end of your contract.

What happens at the end of your PCH deal?

At the end of the agreement, you return the car to the dealer, with no option to purchase it outright. Most people choose to start a new PCH contract, which gets you the keys to a brand-new vehicle. If you love fresh leather seats, cutting-edge technology and that sought-after new car smell, you’ll love PCH loans.

Added benefits of PCH

You’ll also sidestep depreciation, as well as enjoy perks like breakdown cover, waived road tax and complete coverage under the manufacturer’s warranty. For legions of motorists, the hassle-free nature of PCH makes it one of the most desirable UK car finance types.

Beware the mileage limits

As you might expect, PCH deals come with strict mileage limits. That’s because this car finance option doesn’t include the option to purchase, so the vehicle will be returned at the end of your car loan. If you exceed your mileage allowance, you’ll need to pay additional charges to cover the unexpected depreciation to the car’s value. That said, it is still one of the most popular finance methods.

What’s the best type of car finance for you?

When you’re choosing between different car finance options, there are a few things to bear in mind.

Your credit rating

Firstly, your credit rating. If you don’t have a good credit score, you may struggle to get approved for personal loans. That means you’ll need to opt for one of the other forms of car finance.

Instead of an unsecured loan, drivers with a poor credit history can opt for PCP finance, hire purchase and conditional sale car finance deals. These are classed as secured loans because the vehicle is an asset for the finance company. In other words, it can be repossessed in exchange for outstanding finance.

Balloon payments

Another big consideration is the balloon payment. You may know already that you don’t want to own your next car outright. If that’s the case, it’s worth considering personal leasing as this could reduce your monthly costs for new car finance.

On the other hand, if you definitely do want to own the car outright, stick to HP or a conditional sale. An optional balloon payment offers you maximum flexibility, but can affect the way your finance company calculates your car finance deal. While monthly payments tend to be lower for PCP, the final payment is harder to factor into your finances than a manageable monthly payment. In contrast, a hire purchase repayment plan factors in the full value of the car from the outset.

Extra charges for car finance

Finally, there are extra charges. If you want to avoid paying more for high mileage, a hire purchase agreement or personal loan may be the best route. That said, you can find PCP and leasing deals with higher mileage allowances to suit your requirements.

Crunching the Numbers

Whether you’re attracted to the freedom and flexibility of hire purchase or love the idea of continually upgrading to new vehicles with a PCH contract, it’s important to crunch your numbers before committing to a finance agreement.

Up-front affordability

Firstly, there’s your up-front affordability. Bear in mind that a larger deposit can increase the likelihood of approval and potentially help you secure a better interest rate. You may also be able to use your old car for part-exchange with some dealers, which works as a type of deposit or addition to the amount you’re paying.

Car finance terms

Your initial cash deposit isn’t the only factor to consider when asking can I afford to buy a car? Financial factors like your credit score and borrowing history can influence how much lenders are willing to offer and the fixed interest rate available. You’ll also need to factor in variables like your preferred loan term, your budget for monthly repayments and the car’s purchase fee. Our car finance calculator can give you a better idea of the amount you’ll be paying based on your loan amount, repayment term and credit rating.

Future plans

Try to think about any plans you have over the agreed period. Can you continue to pay for car finance for 36 months or do you plan to move house in the next couple of years, for example.

Insurance for your financed car

It’s also worth noting that insurance is not included in most car finance agreements. As the registered keeper, you will need to arrange insurance for the duration of your car finance agreement, and afterwards if you’re paying the full value of the car. Car insurance is a significant cost to take on and may require you to opt for a cheaper vehicle to make car finance work for your budget.

Choosing Between Car Finance Types (UK)

With a good understanding of the different types of car finance in the UK, you can choose the best options for your unique situation. It’s always good to have experts on your team, which is where My Car Credit comes in.

As a car finance broker, we compare deals from a large panel of trusted lenders, so you don’t have to spend hours shopping around. Apply for car finance today using our online form and let us find the right deal for you without all the legwork.

Armed with a wealth of knowledge and experience, plus access to one of the largest panels of lenders in the UK, we help you narrow down your search and secure suitable loan terms and interest rates.

That’s why we’ve put together this guide designed to help make smart and informed decisions. Read on to find out more about the different options available in the UK and how to select the best type of car finance for your needs.

Hire purchase (HP)

Hire purchase loans are often offered by dealers and are designed to get you behind the wheel of your new car ASAP. The loan is secured against the car, which means you don’t own the vehicle outright until you’ve made your final payment and cleared all outstanding debts. HP loans can start with a deposit, usually at least 10% of the total value of the car, but there are plenty of options for no-deposit car loans. You’ll then repay the remaining balance in instalments over the loan period, plus interest. When your loan ends and you’ve paid your final instalment, the car is yours.

You’ll love HP loans if:

• You have your heart set on a vehicle

If you’ve fallen in love with a model and you know you want to drive it for years to come, HP loans can be a great way to stretch your budget further and own the car outright at the end of the loan.

• Your deposit is small

It’s hard to save cash which is why HP loans are so popular in the UK. Some lenders require deposits of just 10%. This gets you into the driver’s seat of a new car ASAP and allows you to spread out the total cost of the vehicle over a longer and more manageable period of time. However, you don’t always need to pay a deposit.

You might not love HP loans if:

• You’re on a strict budget

HP loans offer some great benefits but they’re not necessarily the cheapest option when it comes to monthly payments. If keeping your payments to an absolute minimum is a priority, you may prefer a PCP agreement.

Personal contract plan (PCP)

Like HP loans, PCP agreements start with a deposit. After paying the initial deposit you’ll continue to make monthly instalments over the loan period. At the end of the loan, you have the option to return the vehicle or purchase it outright by making a ‘balloon payment’.

You’ll love PCP loans if:

• You like to upgrade to a new car frequently

If you’re the type of person who simply has to get their hands on the latest iPhone model the day it’s released, you’ll love the concept of PCP loans.

You might not love PCP loans if:

• You plan to drive long distances

Many PCP loans come with mileage limits, which means you can’t exceed a certain figure on the odometer if you want to meet the conditions of your contract.

• You hate cleaning your car

As well as mileage limits, PCP loans require a certain level of commitment when it comes to TLC. You’ll need to keep your vehicle in good condition to prevent penalties at the end of your loan.

Personal loan

Personal loans are similar to PCP agreements, though there’s no option to give back the vehicle at the end of your contract. Initial deposits are generally a little larger than PCP loans, however this often means your monthly payments are smaller.

You’ll love personal loans if:

• You like to keep things simple

Personal loans are simple and easy, with minimal paperwork and a straightforward structure. If you’re looking for a fuss-free loan option that doesn’t involve much number crunching, a personal loan could be a good bet.

• You want to own your car outright

If you want to own your car outright with zero limits on things like mileage and wear and tear, you’ll love the freedom that comes with personal loans.

You might not love personal loans if:

• You have a lacklustre credit history

The nature of personal loans means lenders are a little stricter when it comes to your credit history. If your credit score leaves something to be desired, you may not be eligible for a personal loan. But don’t worry, there are still lots of other great options out there!

• You have your eye on a luxury vehicle

If you’re eyeing up a luxury vehicle, a personal loan may not secure the cash you need to purchase it outright. Most lenders cap personal loans at around £25,000, making them unsuitable for high-value vehicles.

Personal contract hire (PCH)

The term ‘hire’ says it all when it comes to PCH loans. Under these leasing agreements, you’ll rent the vehicle for a predetermined timeframe, and then return it at the end of the loan. There’s no option to buy or sell the car, making PCH agreements ideal if you love new cars but hate the idea of depreciation.

You’ll love PCH loans if:

• You have an excellent credit score

PCH loans have an air of exclusivity and are usually only available to borrowers with good or excellent credit scores. If you have a glowing credit history, taking advantage of PCH loan options could be the best type of car finance for you.

You might not love PCH loans if:

• You want to ‘rent to own’

If you want the option to purchase your car at the end of your loan, a PCH agreement isn’t right for you.  

• You’re on a strict budget

PCH loans are amazing when it comes to getting behind the wheels of the latest models. However, they can cost more than other car options and may not be the best type of car finance if you’re on a strict budget.

• You plan to travel long distances

Like other rent-structured loans, PCH agreements usually place limits on mileage and wear and tear. If you want the complete freedom to use the car as you please it may be better to opt for finance that allows you to purchase the car outright.

Choosing the best type of car finance for you

All in all, the best type of car finance depends on your specific circumstances and preferences. At My Car Credit, we’re committed to finding a great deal that’s suitable for all drivers, including those looking for car finance with a poor credit rating,

If you have any questions, you can email us on enquiries@mycarcredit.co.uk or chat to a member of our friendly team on 01246 458 810.