Is car finance worth it? The pros & cons

Is car finance worth it? The pros & cons

author: Adele Kitchen

By Adele Kitchen

Car finance is one of your biggest outgoings, so it’s worth doing some research to find the most suitable option.

To help you make an informed decision, we run through the pros and cons and answer all your burning questions.

The best option for you depends on a number of factors. Think about: 

  • Your budget - how much can you afford to pay on top of other bills?
  • Do you want to own the car you drive?
  • Are you looking for low monthly payments, with the possibility of buying the car when your contract ends?
  • Do you want to rent a car with low monthly repayments?

What are the different types of car finance available?

Five main types of car finance include (in no particular order): 

  1. Personal Loan
  2. Hire purchase (HP)
  3. Personal contract purchase (PCP) 
  4. Car leasing or Personal contract hire (PCH)
  5. Credit card

Bear in mind, your eligibility depends on your individual circumstances and the lender’s criteria. You may wish to speak to a broker or financial advisor for tailored advice.

Can I use a personal loan to buy a car?

Yes, you can. Most lenders let you apply online or over the phone. Once your loan is approved and you've signed the relevant credit agreement, you pay it back in fixed monthly instalments (including interest), over an agreed timeframe.

Benefits of a personal loan: 

  • Simple to arrange 
  • You own the car outright
  • Your car can’t be repossessed 
  • Fixed monthly repayments
  • Loan terms are flexible, typically one to seven years
  • No annual mileage limits
  • You can buy any type of car, old or new
  • You can sell the car and/or make modifications to it

Pitfalls of a personal loan: 

  • You may be charged more interest if you have bad credit
  • The longer the loan term, the more interest you’ll pay in total
  • You’re responsible for servicing, taxing and maintaining the vehicle
  • You can’t hand the car back to the lender, so you need to pay the loan back in full
  • Even though your car can’t be repossessed, failure to pay the loan will cause a drop in your credit score and three to six missed payments may lead to a default.

car calculator

How does hire purchase (HP) work?

HP is perfect for someone who wants to buy their car outright when their contract ends. 

It works like a loan, where you make fixed monthly instalments (including interest) over a set period of time. Usually one to five years. A deposit of around 10% is due upfront. You can set it up through a car dealership or broker.

Unlike a personal loan, your car is used as collateral. So if you miss payments, the lender could sell your car to cover their losses (usually as a last resort). This added layer of security means they may be more willing to lend to those with bad credit.

When your contract ends, you’ll need to pay an ‘option to purchase fee’ of around £100-200 to claim full ownership.

Benefits of HP: 

  • Simple to arrange 
  • You may still be eligible with bad credit 
  • Low deposit (around 10%)
  • Fixed monthly repayments
  • Loan terms are flexible
  • Low ‘option to purchase fee’
  • No annual mileage restrictions

Pitfalls of HP: 

  • You don’t own the car until you make the final payment
  • The lender could repossess the car if you fall behind with repayments
  • You can’t sell the car or modify it without the lender’s consent (whilst you’re still paying for it)
  • You may face a penalty fee if you end your contract early
  • You are responsible for taxing, servicing and maintaining the car

How does personal contract purchase (PCP) work? 

PCP is suitable for those who want low monthly repayments and the option to either buy or return the car at the end of the contract.

It works like HP in that you pay a deposit followed by fixed monthly repayments over a few years. The loan is secured against your car, so the lender could take it back if you don’t maintain repayments. Again, you can set up the finance agreement through a broker or car dealership. However, with PCP your monthly loan repayments are normally smaller.

When your PCP agreement ends, you have three options:  

  1. Pay the remaining ‘balloon payment’ to buy the car outright
  2. Use the car as a deposit towards a new one (depending on your car’s value)
  3. Return the car, with no further payments due

Benefits of PCP: 

  • Easy to arrange 
  • Low deposit (around 10%)
  • Lower fixed monthly payments (compared to HP, based on same car and loan term)
  • Flexible loan term
  • Different options are available at the end of your contract 

Pitfalls of PCP: 

  • The ‘balloon payment’ may be in the thousands, so HP could potentially work out cheaper overall if you want to buy the car at the end
  • Annual mileage limits usually apply and charges are incurred if you go over them
  • You’ll be charged for excessive wear and tear if you chose to hand the car back
  • The car is used as security, so the lender could repossess it if you fall behind
  • You normally need to pay half of the car finance off before you can request to voluntarily terminate the agreement
  • You can’t sell or modify the car when it’s on PCP
  • You are responsible for maintenance, servicing and taxing the car

car money

How does car leasing or Personal contract hire (PCH) work? 

Car leasing is designed for people who know they don’t want to own their own vehicle. As with PCP, you can upgrade your vehicle generally halfway through, when you have built up some positive equity.

It’s basically like a long-term car rental. You pay a deposit upfront and make fixed monthly repayments over a set period of time (normally two to five years). Then you hand the car back at the end of your contract. You can lease a car through a broker or car dealership.

Benefits of car leasing: 

  • Easy to set up
  • Low deposit (around three month’s rental)
  • Fixed monthly repayments
  • Loan terms are flexible
  • Low monthly repayments (usually lower than HP)
  • Road tax is typically included
  • Don’t need to worry about the car’s value depreciating

Pitfalls of car leasing: 

  • No option to own the car at the end of your agreement
  • The car finance company owns the car and can repossess it if you fall behind 
  • Annual mileage restrictions may apply, with charges if you go over the limit
  • Excessive wear and tear will incur charges
  • You have to pay extra for servicing and car maintenance if you take out a non-maintenance agreement
  • Fees may also apply if you cancel your contract early
  • You can’t sell or modify the car

Can I use a credit card to buy a car?

Yes, a credit card could be suitable for those who want to buy a car and pay off the balance within a short amount of time. There will be a minimum payment due each month, but if you pay more than that you will reduce your balance quicker and pay less interest overall.

Benefits of a credit card: 

  • Quick and easy to apply via a lender or broker
  • You own the car outright
  • Your car can’t be repossessed 
  • Purchases between £100 and £30,000 using a credit card are protected by Section 75 of the Consumer Credit Act 1974 
  • No annual mileage limits
  • You can buy any kind of car you like
  • You can sell the car and/or modify it
  • 0% introductory offers may be available if you have a good credit score

Pitfalls of a credit card: 

  • You may be charged more interest compared to other types of car finance
  • Higher interest rates will apply once any 0% interest offer ends
  • Your credit card limit might not be high enough to pay for the car 
  • Some car dealerships may charge card-handling fees, or not accept credit cards  
  • You may need to pay a balance transfer fee to move money to your bank account
  • Don’t withdraw cash using a credit card, as this can be costly

Frequently asked questions:

car question mark

Can I part-exchange my current car? 

Most car dealerships will allow you to use your current car towards the cost of a new one. If you still have outstanding finance on your car, you may still be able to part-exchange it if the balance is lower than the car’s value. Always check with your lender and dealership first as to what your early settlement figure is against the value of your current vehicle.

Can I get car finance with bad credit? 

Yes, you can get car finance with bad credit, but you may have limited options. The better your credit score, the more likely you’ll be approved with lower interest rates. 

However, this isn’t the only factor lenders take into account. They’ll also look at things like your income and outgoings and how much you want to borrow. Plus, there are some lenders out there who specialise in providing finance for those with less-than-perfect credit scores. 

What other costs do I need to take into account?

Remember to factor in other running costs on top of your finance payments, including: 

  • Petrol
  • Road tax
  • Insurance
  • Servicing and maintenance costs (if they’re not included)

Missed repayments can negatively impact your credit score, making it more difficult for you to get finance in the future. So we suggest you set up a direct debit so you never miss a payment.

Read on to find out everything else you need to know about buying a car.

Disclaimer: All information and links are correct at the time of publishing.

author: Adele Kitchen

By Adele Kitchen

Is car finance worth it? The pros & cons Is car finance worth it? The pros & cons