Skip to content

Which is the best way to finance a car?

When it comes to buying a car, it’s good to know there are a few car finance options available. But how do you know which is the best one for your budget and circumstances?

Our comparison guide will take you through your car finance options, to help you make the right choice for your needs.

When it comes to buying a car, it’s good to know there are a few car finance options available. But how do you know which is the best one for your budget and circumstances?

Our comparison guide will take you through your car finance options, to help you make the right choice for your needs.

Written by
Julie Daniels
Motor insurance expert
Posted
2 JUL 2024
5 min read
Share article

What types of car finance options are available?

There are a few car finance options available. The right one for you will largely depend on your individual circumstances and credit rating. 

Cash

If you’ve got enough savings put by, paying in cash is probably the most economical way to finance a car. Most dealers won’t accept physical money, so you’ll usually need to pay via your debit card or with a direct bank transfer. 

Personal loan

You can buy the car outright, then spread the cost over a longer period of time. It can be one of the cheapest options if you can find a competitive fixed-rate APR. 

Read about the pros and cons of buying a car with a personal loan.

Leasing

Basically, a long-term car rental contract, so the car never actually belongs to you. Pay a fixed monthly amount over a set period, then hand the car back at the end of the agreement.

Read about the pros and cons of leasing a car

Hire purchase (HP)

Spread the cost of your car over several months or years. Once, you make the final payment, the car is yours. 

Read about the pros and cons of car hire purchase.

Personal contract purchase (PCP)

Works in a similar way to leasing, except with PCP you have the option to put down a final ‘balloon’ payment and buy the car at the end of the agreement. 

Read about the pros and cons of PCP finance

Credit card

If you are buying from a dealer or a garage rather than a private seller, a 0% purchase credit card would allow you to buy your car outright, then pay off what you owe over several months, interest-free. You’ll need a high credit limit to buy a vehicle this way, and some dealers may not accept credit cards. 

Read about the pros and cons of 0% purchase credit cards.  

Peer-to-peer loan

P2P platforms allow you to borrow money from individuals or companies instead of a traditional bank or building society. Interest rates are often more competitive, but you’ll need a good credit score to get the best deals.

What can impact my choice when considering car finance options?

There are a few things to consider when choosing the best car finance option for you. 

Are you looking for a new or used car? You can buy any car with a personal loan, while financing agreements such as PCP and leasing are mainly for new cars. 

How strong is your credit score? Your credit rating will affect the types of car finance deals available to you, and the interest rate you’ll be charged. Typically, the higher your credit score, the lower your APR will be. 

How big is your deposit? PCP, leasing and HP agreements require an initial deposit. The more you can spare upfront, the lower your monthly repayments should be. 

How much driving will you be doing? PCP and leasing agreements usually come with mileage restrictions and may charge extra if you exceed these limits. 

Are you happy with the T&Cs? Make sure you understand how long you’ll be tied in for and what fees may apply if you want to terminate the agreement early.

Find the best car finance option for you

When deciding on the best car finance option for you, you’ll need to work out how much you can afford to borrow and pay back each month. 

Our table gives you a simple breakdown of important factors to consider.

Question Cash Personal loan Leasing Hire purchase Personal contract purchase Credit card (not suitable for private sales) P2P loan
Do I have to put down a deposit? No No Yes Yes Yes No No
Do I own the car straight away? Yes Yes No No No Yes Yes
Is the loan secured against the car? N/A No No Yes Yes No No
Are there excess mileage charges? N/A N/A Yes No Yes N/A N/A
Do I have to make monthly repayments? No Yes Yes Yes Yes Yes Yes
Is it available with bad credit? N/A Possibly Unlikely Possibly Possibly Unlikely Possibly
What interest rate will I get? N/A Depends on credit score Depends on credit score Depends on credit score Depends on credit score Depends on credit score Depends on credit score
Early repayment options? N/A Yes Limited  Yes Yes Yes Yes
Flexible payment terms? N/A Yes Limited Moderate Moderate High Moderate
Impact on credit score? N/A Yes Yes Yes Yes Yes Yes

Tips on getting the best car finance deal for you

Whatever car finance option you choose, you’ll want to make sure you’re getting a good deal. 

Here are our top tips for getting the best car finance deal for you:

  • Check the APR – Interest rates can vary between different payment plans. Also, beware of the advertised APR. It’s usually a representative APR that lenders only need to offer to 51% of their customers – typically those with the best credit scores. The actual rate you’ll get will depend on your own credit rating.
  • Check your credit report – make sure your credit file is up to date and error-free. If you take the time to improve your credit score before you apply, it might give you access to better car finance deals.
  • Think long-term costs – a finance deal over a longer period may reduce your monthly repayments, but you’ll pay more in interest overall.
  • Do your research – different dealers may offer different deals, so it makes sense to shop around and compare quotes.
  • Save for a decent deposit – the bigger your deposit, the less you’ll need to borrow or pay back in interest.
  • Pick your car wisely – a lower-spec model may cost you less to buy, finance and insure.
Author image Julie Daniels

What our expert says...

"A car is probably the second most expensive purchase you’ll make, after buying a house. So, think carefully about the options available, and don’t feel pressured into signing up before you’re ready. Take the time to do your sums, read the small print and shop around before deciding on the best option for you."

- Julie Daniels, Motor insurance expert

Car finance calculator

Use our car finance calculator to find out how much a personal loan could cost you to buy a car. It can give you an idea of how much your monthly repayments will be, as well as the overall interest based on different loan terms.

Car finance calculator

Compare car finance deals

Find the right car finance deal for you from a range of trusted lenders. Choose from a range of products including hire purchase, personal contract purchase and personal loans.

Find a car finance deal

Frequently asked questions

How should I finance a classic car?

You may be able to get a finance deal for a classic car, but your options will be limited to a few specialist lenders.

If you’re buying through a private seller, then you should expect to pay cash or take out a personal loan to pay for it.

How should I finance a second-hand car?

Many dealers offer PCP and HP finance agreements for second-hand cars, so it shouldn’t be difficult to find a good deal.

If you’re buying from a private seller, your options may be limited to cash, credit card or a personal loan.

Can you get 0% car finance?

It is possible to get 0% car finance, but these types of deals aren’t common. 0% APR deals are only usually offered on selected brand-new models, so your choice of manufacturer and vehicle may be limited.

In most cases you’ll also need an excellent credit rating to be eligible for 0% car finance.

What’s the best way to finance a car with bad credit?

It might be difficult to find approval for car finance if you have bad credit. This is because lenders think there’s a greater risk of you defaulting on your repayments.

You might want to consider a guarantor loan to finance your car. But you’ll need to find someone (usually a close relative) who will guarantee to make the repayments if you can’t.

Like this?

Then you'll like these