Car Finance : The Basics

Know your PCP from your HP before you face the salesperson.

A woman standing next to a red Hyundai SUV parked outdoors on a sunny day.

Whilst some people can pay cash for their car there are also several finance options available to buyers.

Knowledge is key when it comes to making the right choice for you, rather than the correct choice for the dealership!

Here are the four most common types of car finance available in the UK:

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Hire Purchase (HP)

With this type of finance, you pay an initial deposit followed by monthly installments over an agreed period, usually between 12 and 60 months. Once all the installments have been paid, you own the car outright. This type of finance is usually available from car dealerships and finance companies. It's considered a stable option and it's easy to understand, it also allows you to own the car once the payments are finished. However, the interest rates can be higher than other options and the car's value depreciates while you are making payments.

Number 2 inside a circle, with a right-pointing arrow outline surrounding it.

Personal Contract Purchase (PCP)

This type of finance is similar to Hire Purchase and Leasing but with a few key differences. With PCP, you pay an initial deposit and then monthly installments over an agreed period, usually between 12 and 36 months. At the end of the agreement, you have the option to return the car, keep the car by paying the final balloon payment, or trade the car in for a new one. It allows you to keep your options open, you can return the car, keep it or trade it in. However, it's important to keep an eye on the mileage and the final balloon payment can be high. This kind of finance is very popular with car dealers as it gives the impression of low payments and makes it very easy for them to move you into another car at any stage. It can be an expensive way to buy or lease a vehicle.

Check out the Pros and Cons of PCP finance here.

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Personal Contract Hire / Leasing (PCH)

This is most commonly called “car leasing” and is most commonly available on new cars. This is where you pay a fixed monthly amount for the use of a car over an agreed period, usually between 12 and 48 months. At the end of the agreement, you return the car to the lender. This type of finance is usually available from car dealerships and finance companies. It's considered a flexible option as it allows you to change cars more frequently and you don't have to worry about the car's depreciation or maintenance costs. However, you don't own the car and you will have to return it at the end of the agreement and if you exceed the mileage limit or if there is damage to the car, you will be charged extra fees. Whilst it’s possible to lease a used car the value, at least in my opinion, seems to be in new vehicle leasing which can be much cheaper than you might think (sometimes cheaper than a PCP lease on a used car). You could argue that it makes sense to own appreciating assets and to rent depreciating ones! Find out more about leasing from our car leasing explained guide. Sites like LeaseLoco and CarLease.co.uk can help you find a great deal.

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Bank Loan

This is slightly different to the other options as it’s secured against you rather than the vehicle. This means the car has no finance against it so can be sold at any time without the need to settle the loan first, you could then reinvest into another car or something else – if you keep making those payments of course!

Each option has its own pros and cons and it's important to weigh them up carefully before deciding. Additionally, it's always a good idea to shop around and compare offers from different lenders (perhaps using a comparison site) and different dealerships.

When choosing the right car finance option for you, it's important to consider your budget, how long you plan to keep the car and whether you want to own the car or not.

Use care and common sense

There are a variety of sales techniques that car dealers in the UK may use to lure people into car finance, even those who have clearly stated that they want to pay cash. In my opinion, some of these techniques and tactics are bordering on unethical but you can, I’m sure, form your own opinion.

Ceramic unicorn piggy bank with four stacks of coins in front, on a wooden surface against a gray wall.

Low monthly payments

Car dealers may advertise low monthly payments to make financing a car seem more affordable despite the fact that lower cost or better value payment terms may be available.

Two men are walking and talking in a brightly lit modern lobby or common area with large windows and plants.

Pushy salespeople

Some car dealers may employ pushy salespeople who use high-pressure tactics to get customers to sign on the dotted line.

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Limited-time offers or “other interest”

Car dealers may use limited-time offers or the spectre of another interested party to create a sense of urgency and pressure customers into making a decision.

An automotive repair shop with disassembled vintage cars, including a car body on stands in the foreground and another partly assembled to the left, with stacks of tires in the background.

Add-ons and upgrades

Car dealers may offer add-ons and upgrades, such as extended warranties, insurances, or service plans, to increase the overall cost of the sale. It has been known for unscrupulous dealers to throw these extras in “for free” but the cost is added to the finance amount!

A glass jar tipped over with pennies spilled onto a wooden surface.

Taking focus away from the total cost

Car dealers may focus on the monthly payment rather than the total cost of the car, which can make the financing seem more affordable.

Two men in business attire shaking hands across a white table with documents, smiling and looking at each other.

Not disclosing

all the terms of the finance or the interest rate or giving them to you in a bundle of paperwork that they hope you won’t read through.

Not every car salesperson is pushy or greedy and there are some great salespeople around who offer superb service to their clients. Just remember that it’s a hard industry that is fuelled by commissions and very tough targets.

Always go into the dealership prepared and never sign up for something there and then without conducting your research. Smoke and mirrors are widely used by car dealers to lure people into finance agreements such as “dealer contributions” or extra services offered that are only available for those taking finance. Always question the ethics and motives of these “amazing deals” and always do the sums yourself and compare what else is available to you from elsewhere.

Not everyone in the world is trying to rip you off or unfairly profit from you, not every car dealer, there are some great ones out there but there are also a few sharks!

by Jim Starling https://linktr.ee/dnag

Please note that I am not a financial advisor or finance professional, this information is for your guidance only; please always consult a qualified finance professional for such financial advice.