Which Car Finance Option Is Best?


If you can’t afford cash, a personal loan is usually the cheapest way to finance a car deal – but only if you have a good credit score. You can get a personal loan from a bank, building society or finance provider if your credit rating is good. You can spread the cost over one to seven years.

With so many different ways to finance a car – either through a dealership, online broker or car supermarket – how do you decide which one is best? Our guide explains how each one works and things to be aware of, to help you decide.


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Personal Contract Purchase (PCP)

PCP car finance is a good option for young drivers looking for cheap monthly payments

PCP deals are one of the most popular finance methods for purchasing new and used cars. With a PCP deal you borrow the cash to buy your chosen car from a dealership, broker or car supermarket. You then repay the amount you borrow (plus interest charged at an average rate of 4-7%) over the contract term, usually between 1-5 years.

A deposit of around 10% is usually required as a minimum contribution towards the car’s purchase price. However, you can put as much towards the deposit as you like in order to lower the monthly payments. At the end of your contract you can choose to pay a final lump sum known as a ‘balloon payment’ to own it, or hand it back to the provider with nothing more to pay.

  • Who is it for? People who want the option to purchase a new or used car and want to keep monthly payments low.
  • What do I need to be aware of? Damage and mileage restrictions, final balloon payment costs, APR (Annual Percentage Rate) interest rates

Hire Purchase (HP)

A Hire Purchase is a type of car finance where you can own the car at the end

HP car finance is a simple, more traditional method of buying a new or used car from a dealership, car supermarket or third-party provider. You usually pay a 10% deposit (you can pay more to lower the monthly payments), followed by fixed monthly repayments back to the lender that together cover the entire value of the car. HP agreements can last anywhere between 1-5 years.

At the end of your HP deal you can pay a small ‘option to purchase’ fee (usually between £100-£200) to own the car. Or you can hand the car back to the provider at the end and walk away with nothing more to pay.

  • Who is it for? Those set on owning a car that want to pay fixed monthly payments for it without needing to pay a large fee at the end
  • What do I need to be aware of? Often higher monthly payments, secured loan against the car means it can be repossessed if payments aren’t made

Personal leasing (Personal Contract Hire/PCH)


Personal car leasing is essentially long-term hiring of a brand-new vehicle for fixed monthly payments. You won’t have the option to own the car at any point, so the cost of the lease is based on the depreciation over the term of your agreement. The term takes into consideration an initial payment (a non-refundable amount which goes against the total cost of leasing), contract length and annual mileage.

At the end of a lease deal you hand the car back to the leasing provider with nothing more to pay (as long as the car isn’t damaged and you’ve stuck to your agreed mileage limit).

  • Who is it for? People who want the latest car every few years and want to drive a brand-new car, without being fussed about owning it
  • What do I need to be aware of? Damage and mileage restrictions, no option to purchase the car, bad credit not usually considered

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Personal car loan

A personal loan is the best type of car finance if you can't afford cash

A personal car loan involves borrowing all or part of a car’s value to purchase it, before making fixed monthly repayments over 1-7 years, plus interest. You can get a loan either from your bank, a building society or car finance broker. We recommend comparing offers from different providers to see which one offers the cheapest total repayments.

You won’t need a deposit in order to get a personal car loan, and you’ll own the car the minute you buy it from the dealer, private seller or car supermarket using the borrowed money.

When it comes to deciding on a car loan, you can choose between a secured or unsecured loan. The former is generally only reserved for borrowing larger amounts and for those with poor credit as the risk of lending is higher. On the other hand if you have good credit, you’ll probably get favourable interest rates on an unsecured loan. 

  • Who is it for? People who want to own a car straight away and be able to modify it and have no restrictions on how it can be used
  • What do I need to be aware of? Total cost of borrowing, APR interest rates and secured versus unsecured loans

0% car finance


There are car finance deals out there which are advertised as having 0% interest. While this may seem like a great deal, you should check that the initial payment isn’t inflated in order to make up the funds elsewhere.

These deals aren’t often the ‘scam’ that they’re labelled, but they can be hard to qualify for. Unless you’ve got a good to excellent credit rating, it’s unlikely that you’re going to be approved for 0% car finance. Plus, there’s a risk that the hard credit search needed to check eligibility will negatively affect your credit score further if you’re rejected.

Just like with any form of car finance, you should make sure that a 0% interest deal fits with your budget, is for a car you want and you’ve built up a good credit score in order to qualify for the loan. Another thing to be aware of is the contract length – how long are you being expected to make monthly payments for the car? Often 0% car finance deals can last as long as six years – in this time your automotive needs may change, in which case you could come unstuck if you still owe money on a car.


Buying a car using a credit card

You can finance a car using a credit card, which can work out cheap

One of the more unconventional ways to buy a car is using a credit card. But if done right, you may find that it’s one of the cheapest methods.

First of all, you’d need to find a dealer that accepts credit cards as a payment method (not all do), before choosing your ideal credit card. Most cards have a maximum spend limit of £5,000 so they’re best saved for smaller or used cars.

If you want a good interest rate on your credit card repayments, you may want to look at 0% credit cards in order to benefit from interest-free payments. Remember to consider the representative APR before applying for a 0% credit card, as those with longer periods of 0% interest balance transfers often have higher interest once this window ends.

Considering purchasing your next car using a credit card? It may even be worthwhile having some money saved up that you can put towards the car and pay the rest with a credit card.


How to get the best car finance deal

  1. Understand APR interest rates – a big factor affecting how much your loan repayments cost is the APR interest rates. If you don’t want to risk increasing interest rates bumping up your monthly repayments, then you should consider car finance that has fixed, not representative, APR interest rates.
  2. Think about your term – longer car finance terms may reduce your monthly payments, but the chances are you’ll pay more interest and the total cost of borrowing will be more than a shorter term with higher monthly payments. You should also consider putting as much deposit down as possible (where applicable) in order to get the best price on the monthly repayments.
  3. Use a comparison website to avoid haggling – if you shop around for your car finance you’ll be able to find the best option. Moneyshake lets you compare hundreds of PCP and car leasing deals on popular makes and models to get the best price. All cars are new and nearly-new.

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Best car finance option for low monthly payments


PCP finance tends to offer the lowest monthly payments out of the different car finance types. That’s because the loan repayments don’t factor in purchasing the vehicle, as this is an option at the end of your agreement. You can also choose to take out a PCP agreement on a used car which has already depreciated in order to reduce your monthly payments further.


Best car finance option for people who like driving new cars


New and young drivers will probably want to keep monthly payments low, especially if the car is their first one and they don’t have a lot of expendable income.

In this case, PCP on a used car would make sense in order to keep car payments down. There’s also the benefit of being able to cancel the agreement early if 50% of the total finance has been paid. Remember that this includes the final balloon payment cost and any interest/fees.

Car leasing is also worth considering if you’re a young or new driver and want the latest car for fixed monthly payments. There are lease deals out there for less than £150 per month, with flexible upfront payments that won’t require you to have lots saved up.

If you do choose to go down the car leasing route, remember that you won’t own the car and will need to keep up with the monthly payments.


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