Car finance: What are the pros and cons?

Car finance can be overcomplicated, but Car Credible breaks it all down to help make it clear and simple.

In recent years, taking out finance rather than paying for a car outright with cash has been rapidly growing.

There's nothing better than getting a new car, and previously it would take months, even years to save up for the vehicle of your dreams.

But now, over 90% of new cars are bought on finance and we're seeing that even used cars are becoming increasingly popular to finance than buying straight up.

The biggest problem consumers face when taking out a car finance deal, however, is that it can be overcomplicated and overwhelming, particularly if you are new to this type of purchase.

We created Car Credible to help you with your car finance deal, making it clear and simple to find the right deal to suit your needs and budget.

Check your deal now

We've comprised a list of the different - and most popular - types of car finance that are available to you, and the pros and cons of each one.

It's important you consider your own personal requirements before diving into a deal. Everyone has different situations, so you need to weigh up what is best for you. 

PCP (Personal Contract Purchase) finance

This is the most popular way to take out a car finance agreement in the UK. 

It is ideal for those that want to change their car regularly and make lower monthly repayments. 

It’s a variation of a Hire Purchase (HP) but instead of repaying the entire cost of the vehicle, you only pay for the depreciation of the car. 

At the end of the agreement, you can choose to make the optional final payment (balloon payment) to own the car outright or hand the car back to the finance company with no further liability, provided you have taken care of the car and have not exceeded the mileage allowance.

Here is a breakdown of what you get with a PCP to help you make an informed decision.

Monthly payments - LOWER THAN HP
No deposit option - YES
Do you own the car outright at the end of the contract? - OPTIONAL
Excess mileage charges - YES - IF YOU HAND BACK THE CAR
Damage charges - YES - IF YOU HAND BACK THE CAR

HP (Hire Purchase)

This is another of the more popular and straightforward finance agreements. 

You don’t own the car until you have paid all sums due in terms of the hire purchase agreement. You are essentially paying in agreed monthly installments until you have paid the entirety of the total price. 

The interest rate is generally fixed and you'll typically pay less of it over time because you are paying the total of the car off faster than you would in a PCP.

Here is a breakdown of what you get with an HP to help you make an informed decision.

Monthly payments - HIGHER THAN PCP
No deposit option - YES
Do you own the car outright at the end of the contract? - YES
Excess mileage charges - NO
Damage charges - NO

PCH (Personal Contract Hire)

This is an agreement growing in popularity amongst UK consumers whereby you rent the car from the finance company just as you would if you were renting a car for a day or a week. 

It’s a long-term rental agreement and at the end of the contract, the car is returned to the finance company. 

You are committed to the term and to making all payments, and the finance company is always the owner of the car.

Here is a breakdown of what you get with a PCH to help you make an informed decision.

Monthly payments - LOWER THAN HP
No deposit option - NO 
Do you own the car outright at the end of the contract? - NO
Excess mileage charges - YES
Damage charges - YES

The above information may not be enough to help you make a decision on whether a particular type of car finance works for you, which is why we have provided a list of advantages and disadvantages of car finance, regardless of which type you take out.

Car finance advantages

You can get a better, more expensive car as you're not having to pay for it outright with cash.

The cost is spread out so you can buy that £20,000 car you've been eyeing up for months over the course of several years rather than in one go.

The payments are fixed on a monthly basis, so you can plan and budget in advance, knowing exactly what you can expect to pay.

You can be driving a car on a tight budget; if you know exactly what you can afford, you can make it work easily so you don't feel like you're out of pocket at any time.

It will also improve your credit score providing you are able to make the payments each month without any issues. This can in turn help you out when applying for further loans, including a mortgage.

There's no hassle of selling it on as you simply hand it back to the finance company at the end of your agreement on a PCP or PCH. If you are on an HP you would have already made the decision that you wanted to own the car outright at the end of the deal.

When you do wish to get a new car, you can use your current car as a deposit or part-exchange, meaning you won't have to pay any of your own cash out of pocket.

Car finance disadvantages

You will have to pay interest, which is only natural when taking out any finance agreement but it just means you'll have to be extra vigilant when planning and budgeting.

You will be unable to make any modifications to the car because you don't actually own it yourself, it's still the property of the finance company unless you take up the buying option at the end of a PCP or pay off the full amount in an HP.

It can be difficult to get out of and this is one of the most common problems faced by consumers with car finance and is one of the main reasons we created Car Credible. You are able to get out of your car finance and we can help you do so. Just follow this link to sign up and get a free car finance appraisal and all the options available to you.

Mileage fees can be a killer as you typically have to let the finance company know at the start of your deal how many miles you anticipate driving per year. Obviously, if circumstances in your life change, such as you get a new job that requires long-distance driving, for example, it could end up costing you a lot of money at the end of your deal.

If you damage the car, it could end up costing you a lot more than if you'd already paid for the car in cash because again, the car doesn't belong to you.

Check your deal now

If you are in a constant cycle of getting a new car every few years, you will always be repaying the finance company every month. 

It can negatively impact your credit score if you miss a payment or you've taken out an agreement that's too expensive for you to afford and you're relying on other loans to cover it. You must be very careful when it comes to taking out finance agreements.

So there you have it. We hope this has helped you understand a little bit more about car finance and the options available to you, as well as the pros and cons of taking out an agreement.

Before you get yourself into one, invest some time in making plans and budgets to ensure everything is right for you.

Car Credible can help you with your car finance, simply sign up today for your free appraisal where we will show you everything you need to know about your deal.

Image credited here -

NewsletterGet the latest articles and product updates
Deal Checker
Latest Newsvoluntary-termination-in-car-finance
What is voluntary termination of car finance?In this guide, we will explain what voluntary termination of a car lease is and why a person may wish to end their finance agreement on a car early.
How does car finance for businesses work?If you're a business owner and want to finance cars for your employees, we have all the information you need to know in this guide.
Does car finance affect your credit score?Whenever you take out any form of loan, your credit score could be affected. In this guide, we'll look at the ways car finance could impact your credit.