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What are the pros and cons of buying a car on finance?

When it comes to buying a car, you’re faced with many decisions – not least of which is how to fund it.

Over the years, car finance has become an increasingly popular option with buyers. In a nutshell, car finance can help you spread the cost of a new vehicle, rather than having to pay the full amount upfront. A good alternative if, like many, you don’t have a lump sum of cash readily available.

Woman leasing car

But with so many types of car finance options out there, it can be tricky to choose the most suitable way to fund your purchase.

So, to help you navigate through the maze and make the right choice for you, we’ve cut through the jargon to look at the main types of car finance and their pros and cons.

You can read more about what car finance entails using our guide: Car Finance Explained: What Is It & How Does It Work?

Hire Purchase

If you want to own your car outright by the end of your finance agreement, hire purchase (HP) is one option that is worth considering.

How does hire purchase work?

With a hire purchase agreement, you typically put down an initial deposit – usually around 10% -(although you don’t have to) followed by monthly payments over a fixed period. Once you have finished making the payments, you become the legal owner of the car.

Car keys

If you put down a larger initial deposit, you’ll have lower monthly payments and vice-versa. Interest is added to the loan; however, much like a standard loan, it’s often possible to pay it off earlier depending on your agreement’s terms and conditions.

What are the pros and cons of hire purchase?

If you’re thinking of buying a car with a hire purchase agreement, it’s a good idea to weigh up the pros and cons first.

Pros of hire purchase:

  • You don’t have to use a lump sum or save up to purchase the car you want, meaning you could take advantage of buying a new, higher specification car
  • You can spread the cost of the car over a longer period of time to make repayments more affordable. Typically, repayments on hire purchase agreements can range from one to five years
  • The interest rate is fixed meaning you’ll know exactly what you have to pay each month and for how long
  • You own the vehicle as soon as the agreement comes to an end
  • If you find yourself in a position to do so, you can often pay off the agreement and own the car earlier
  • You can choose a deposit that fits your budget, often starting from £0
  • There are no restrictions such as mileage or service clauses

Cons of hire purchase:

  • Interest is added to your monthly payments, meaning you’ll pay more than if you’d paid for the car upfront
  • The longer your repayment term, the more interest you’ll pay on top of the car
  • The provider with whom you took out the agreement technically owns your car until the plan is paid off, meaning they have the right to repossess it should you fail to keep up with repayments
  • If you want to end the agreement early, the outstanding amount has to be paid in full, regardless of whether the car is worth less than the amount secured against it
  • A credit check is performed when taking out hire purchase and your rating can affect the interest rate you’re offered

Personal Contract Purchase (PCP)

PCP has become an increasingly popular choice for car finance over the years with flexible options available when your term comes to an end.

How does PCP work?

PCP works a little bit like a hire purchase agreement, but there are some key differences when the term ends.

Lady at car showroom

You still pay a deposit on the car you want and there are still monthly repayments until the end of the agreement. However, when the contract ends, you have some choices as to what you can do. You can either return the car, make a lump sum payment to purchase the car in full, or part exchange it.

It’s a slightly more complicated car finance option, so let’s look at the pros and cons.

Pros of PCP:

  • Typically, monthly repayments are lower than with hire purchase
  • It’s easier with PCP to roll your deal over at the end of the term and a good choice if you like the idea of a new car every few years
  • You’re protected to some extent against depreciation, having the option to hand the car back to the provider
  • With a newer vehicle, there are often less maintenance and running costs

Cons of PCP:

  • There’s no guarantee you’ll become the owner of the car. If you can’t make the end lump sum repayment, you’ll either have to hand the car back or start a new deal
  • You have to keep the car in good condition and are tied to where you can get it serviced. Penalties for damage can be high
  • There are typically limits on annual mileage and penalties for exceeding these
  • You can’t modify the vehicle during the term of the contract
  • If you’re unable to make monthly repayments, you’ll have to return the car and potentially make a lump sum payment to make up the difference in value
  • If you choose to upgrade to a new car at the end of the agreement, you may have to pay more deposit

Personal Contract Hire (PCH)

Personal Contract Hire is a common way of leasing without worry and if you enjoy having a new car every few years.

How does PCH work?

Personal contract hire works similarly to PCP, but with one major difference. With PCH you make an initial deposit followed by monthly payments for a fixed term, but at the end of the agreement, there’s no option to purchase – you simply hand the car back.

If you’re looking for more flexibility and have no plans to buy the car at the end of a PCP, personal contract hire could be the right option for you.

Pros of PCH:

  • It can be cost effective. Monthly payments on a PCH deal are typically cheaper than those for a PCP. You may, however, find you have to pay the first few monthly instalments upfront as a deposit, although you can get PCH deals with £0 deposit
  • There’s the freedom to change your car every few years without worries about depreciation
  • You have fixed monthly payments, which can include road tax and a maintenance package if you opt in for this

Cons of PCH

  • You won’t own the car
  • There are typically limits on annual mileage, although there could be the option to increase these by increasing your monthly repayments
  • If you damage the car, outside of any wear and tear, you could be charged for repairs by the hire company
  • Other restrictions may apply, such as taking your car abroad, depending on the plan’s terms and conditions

Pros and cons of car finance at a glance

 Deposit requiredFixed monthly paymentsOwn car outrightSecured against car?Mileage limitRisk of depreciationEarly settlement optionFines for damage
Hire purchaseYesYesYesYesNoYesYesNo
Personal Contract PurchaseYes (lower)YesOptionalYesYesNoYesYes
Personal Contract HireYes (lower)YesNoYesYesNo No Yes

Which type of car finance is right for you?

Different types of car financing will suit different needs and circumstances. Whether you want the flexibility to change the car you drive more frequently or are simply looking for the most cost-effective route to car ownership, each option has its own pros and cons.

Family in car

When it comes to choosing the right one for you, it’s important to take your time and understand all your options.

Will I get approved for car finance?

It’s easy to find out if you’ll get approved for car finance. By clicking Apply Now below, you’ll find out in minutes if you’ve been accepted without affecting your credit score.

It’s quick and easy. Just Apply Now.

Representative Example of Credit

We expect more than 51% of our customers to achieve this rate.

Loan Amount Total Cost of Credit Representative APR 60 Monthly Payments Deposit Amount Loan Term Total Amount Payable
£7,500 £3831 19.1% APR £188.85 £0 60 Months £11,331

All offers are subject to change at any time, you must be 18 or over and finance is subject to status, vehicle availability and terms and conditions apply. We can introduce you to a limited number of finance companies, a commission may be received. Failure to maintain payments may result in termination of your agreement and the vehicle being returned, this could affect your credit rating and make it more difficult to obtain credit in the future. All prices correct at time of publication.

We purchase a wide variety of vehicles from all over the country to ensure the best quality and value for our customers, all of our cars go through a thorough inspection process and if they do not meet our standards we do not sell them. We endeavour to inform our customers (where possible) the provenance of the vehicle they are buying and as such we will always inform you if the vehicle has previously been either an ex fleet or hire car. Should your vehicle be an ex hire/fleet car please do not be concerned as we would never value this vehicle differently when you come to part exchange it and there is no difference to the CAP valuation either.

You should try and estimate the distance you will travel as accurately as possible to try and avoid excess mileage charges at the end of your contract.

All pictures and/or photos and car descriptions on this site are for illustration and reference purposes only and are not necessarily the vehicle on offer. All offers are subject to change at any time and are subject to finance approval and vehicle availability. All prices correct at time of publication. E & OE.

Hippo Vehicle Solutions t/a ‘Hippo Motor Finance’ is authorised and regulated by the Financial Conduct Authority. FRN 658076. We are a Credit Broker not a Lender and can introduce you to a limited number of lenders. We typically receive a fixed commission calculated by reference to the vehicle model, product or amount you borrow, for introducing you to a lender but this does not affect the interest charged on the agreement, all of which are set by the lender. All offers are subject to change at any time and are subject to finance approval.

We endeavour to ensure that all information including the specifications and finance availability are accurate. Whilst we make every effort to display correct information we are aware that errors may occur occasionally. We are not able, therefore, to guarantee the accuracy of all information especially when given to us by third parties. If you do require clarification of some information you have seen on our website, please email us at info@hippomotorgroup.com . This does not affect your statutory rights.

We are a broker not a lender and our registered office is Unit 26 Trident Park, Trident Way, Blackburn, BB13NU.

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