Car Finance Options Explained: Find the Best Deal for You

21 Jan 2025

Car Finance Options Explained: Find the Best Deal for You
Looking to buy your next car but not sure how to pay for it? Car finance can be confusing, but don’t worry—we’re here to break it all down for you. Whether you’re a first-time buyer or upgrading to your dream car, this guide explains the top car finance options to help you make an informed decision.

From Hire Purchase (HP) to Personal Contract Purchase (PCP), leasing, Gurarontor loans and personal loans, we’ll cover the pros, cons, and how each option works, so you can choose the best fit for your lifestyle and budget.

What is Car Finance?
Car finance is a way to spread the cost of buying a car over time. Instead of paying upfront, you can choose a plan with fixed monthly payments, making car ownership more affordable.

With so many options like HP, PCP, leasing, or even a guarantor loan—it’s important to understand how each works and which suits your needs best.

1. Hire Purchase (HP)
What is HP?
Hire Purchase is a simple car finance option where you pay for the car in monthly installments over a set period. Once you’ve made all the payments, the car is officially yours.

How it Works:
Pay a deposit (usually 10% of the car’s price).
Spread the remaining cost over monthly payments (1-5 years).
Own the car outright after the final payment.

Pros of HP:

You own the car at the end.

No mileage restrictions—drive as much as you want.

Easy to understand with fixed payments.

Cons of HP:

Higher monthly payments compared to PCP.

You don’t own the car until the final payment.

Risk of repossession if payments are missed.

Who is it for?
Drivers who want to own their car and prefer straightforward payments without surprises.

2. Personal Contract Purchase (PCP)
What is PCP?
PCP is one of the most popular car finance options because it offers flexibility. You pay lower monthly installments, and at the end of the contract, you choose whether to:

Buy the car by paying a balloon payment (a final lump sum).
Return the car.
Trade it in for a new one.
How it Works:
Pay a deposit.
Make monthly payments based on the car’s depreciation (not the full value).
Decide at the end whether to keep, return, or upgrade the car.

Pros of PCP:

Lower monthly payments than HP.

Flexible options at the end of the agreement.

Ideal if you like upgrading to a new car every few years.

Cons of PCP:

Mileage limits apply—go over, and you’ll pay extra.

You don’t own the car unless you pay the balloon payment.

Can be more expensive long-term if you buy the car.

Who is it for?
People who like driving a newer car and want flexibility without committing to ownership.

3. Car Leasing (Contract Hire)
What is Leasing?
Leasing is like renting a car long-term. You pay monthly to use the car, and at the end of the lease, you simply return it—no ownership involved.

How it Works:
Pay an upfront payment (3-6 months’ worth of installments).
Make fixed monthly payments for the lease duration.
Return the car at the end of the contract.

Pros of Leasing:

Drive a brand-new car every few years.

Lower monthly payments than HP or PCP.

No worries about depreciation—just hand it back.

Cons of Leasing:

You’ll never own the car.

Mileage limits apply, with penalties for exceeding them.

Customization options are limited.

Who is it for?
Drivers who value driving a new car every few years without worrying about ownership or depreciation.

4. Guarantor Loan
What is a Guarantor Loan?
A guarantor loan is perfect for those with poor credit. A trusted person (like a family member) agrees to cover the payments if you can’t, making it easier to get approved.

How it Works:
Apply with a guarantor who has good credit.
Make fixed monthly payments.
Your guarantor steps in if you can’t pay.

Pros of Guarantor Loans:

Ideal for drivers with poor credit.

Helps you build your credit score.

Fixed payments make budgeting easy.

Cons of Guarantor Loans:

Relies on a guarantor—missing payments could strain relationships.

Higher interest rates compared to standard loans.

Not ideal if you’re unsure about regular payments.

Who is it for?
Young drivers or those with bad credit who have a trusted guarantor willing to help.

5. Personal Loan
What is a Personal Loan?
A personal loan is a straightforward way to buy a car outright. You borrow money from a bank or lender and pay it back in monthly installments.

How it Works:
Apply for a loan and receive the funds upfront.
Buy the car outright—you own it from day one.
Pay back the loan over time.

Pros of Personal Loans:

You own the car immediately.

No mileage or usage restrictions.

Competitive interest rates if you have good credit.

Cons of Personal Loans:

Approval depends on your credit score.

Missing payments can harm your credit history.

Not suitable for those with poor financial stability.

Who is it for?
People with good credit who want to avoid dealership finance and own their car outright.

Which Car Finance Option is Best for You?
Ask Yourself:
Do you want to own the car? HP or a personal loan is the way to go.
Need lower monthly payments? PCP or leasing offers more flexibility.
Bad credit? A guarantor loan can help.
Benefits of Car Finance for you
Flexibility: Tailored payment plans that fit your lifestyle.
Affordability: Spread the cost of a car without draining your savings.
Peace of Mind: Reliable options that match your driving habits and budget.
Final Thoughts on Car Finance
Finding the right car finance option doesn’t have to be stressful. By understanding Hire Purchase (HP), Personal Contract Purchase (PCP), leasing, guarantor loans, and personal loans, you can choose a plan that fits your needs and budget.

Pro Tip: Always compare deals, check the fine print, and ask questions before signing on the dotted line. Ready to drive away in your dream car?

Click here to explore your options and hit the road! 

Editorial Disclaimer: Opinions expressed here are the author’s alone, and not those of any bank, credit card issuer or any other company. This article has not been reviewed, approved or otherwise endorsed by any of these organisations. NB: The information on this page does not constitute financial advice, please do your own research to ensure that the product / service is right for your individual circumstances.