Car finance is a broad term which covers essentially every method there is to buy a car. Usually however, when people say they’ve bought a car “on finance” it means they bought through the car dealership’s loan provider.

Because cars are expensive it’s not realistic to expect people to buy a car outright. The average price of a new car in the UK is just under £29,000! Of course, not everyone buys a brand new car and often it’s advised against because of new car depreciation.

Regardless of whether you are buying a new car or just looking for something to replace your old banger, there are several ways of financing a car.

A Quick Look at Car Finance Options

  • Personal Contract Purchase (PCP): a type of leasing whereby you pay monthly and return the car at the end of the contract.
  • Hire Purchase (HP): a type of leasing whereby you pay monthly and own the car at the end of the contract.
  • Personal Bank Loan: you can use a personal bank loan for any reason, and this is a popular way to buy a car outright.
  • Credit Card: like a normal purchase, you can pay for a car on your credit card if you have a large enough credit limit.

There are many other ways to buy a car but the above four tend to be the most common. The cheapest way to buy a car is to save up for it – even if you can’t manage to save the full cost of the vehicle, saving a large deposit will reduce the amount you borrow and therefore the amount of interest you repay.

A 0% credit card is also a cheap way of buy a car: as the interest rate is 0%, you won’t accrue any interest on the amount you borrow, however it is important to maintain at least your minimum payments and make sure you know when your credit card expires or the 0% interest rate period ends. Interest is charged on your whole borrowing and so using a credit card with a high interest rate can become quite expensive. As with any revolving credit product, it is recommended you try to pay off as much of the balance as soon as you can afford to do so.

PCP and HP are both finance options that are often extended by the car dealership itself (or rather, the loan provider they work with). If you intend to change your car regularly, then a PCP might be a good option as you return the car after around 3 to 5 years, however you never actually own the car and so it can never become a financial asset. Using a personal contract purchase to buy a car is a bit like renting a house.

A hire purchase agreement on the other hand means you will own the car at the end of the agreement and some people find the monthly payments an affordable way to manage their money. Some dealerships may offer 0% APR hire purchase plans to encourage buyers, so it can be a cheap way of financing the car as well – especially if you don’t mind what type of car you buy. Plus, you may receive additional benefits like free servicing and MOTs throughout the contract period which will save you a fair bit of money in the meantime.

As well as the cost of the car, you must consider the insurance and road tax costs. Newer cars tend to have cheaper road tax because they produce less emissions, and many electric and hybrid vehicles have free road tax so it may be something to bear in mind. Your insurance will depend on the car, its use, you and your driving history but you should always shop around to find the cheapest quote.

However you decide to finance a new car purchase, make sure that you can afford the repayments and that you have a realistic plan to repay the borrowed sums. Cars are sometimes seized as assets if you fail to make your agreed credit repayments. A PCP agreement means your car can be repossessed by the car financer if you don’t keep up with your repayments so it’s important that you only take out credit you can afford to repay or perhaps look for a cheaper alternative.

If a car is a necessary asset – maybe you need one to get to work or take the children to school – then see if you can adjust your monthly budget to accommodate the repayments or put some money away towards a new one.