What's the best personal car finance for me?

Around nine out of 10 new-car purchases are made using some kind of new-car finance. The reasons are clear: not everyone has tens of thousands of pounds available to buy a new car with cash, so finance lenders offer a range of schemes that are suitable for a range of personal needs.

That means you have options whether or not you want to keep the car once the finance ends, and a choice of laying down a larger deposit to keep the monthly payments low, or increase the monthly payments if you don't have the up-front cash.

It's important that you select the right kind of car-new finance for you. Here we explain each of the available options, and go through the pros and cons of each.

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Personal Contract Hire (PCH)

Car leasing is often referred to as Personal Contract Hire, or PCH. It centres around fixed monthly payments which are calculated based on the vehicle's expected depreciation - the difference between the purchase price and the resale value at the end of the agreement, taking into account age and mileage. The more value the car is expected to hold, the lower your payments will be, which could make it possible to lease a more prestigious car than you might think was otherwise affordable. 

Pros and cons of leasing a car

Pros

- Drive a new car every two or three years without having to worry about it running out of warranty, how much value it will lose, or how you'll sell it on.

- Leasing requires a smaller deposit and lower monthly bills than you'd pay if buying the car.

- Payments are fixed and can include a maintenance package; VED is usually included.

- Simply hand back the car at the end of the agreement.

- If you are VAT-registered you can reclaim 50% of the VAT on finance payments, and 100% of the VAT on a maintenance agreement.

Cons

- There's no option to buy the car at the end of the contract.

- You'll have to take out comprehensive car insurance because the car isn't yours until the end of the agreement.

- You'll face stiff financial penalties if you exceed the mileage limit.

Best for

Those who want to run a new car every few years with fixed monthly bills and no commitment to buying the car outright.

Personal Contract Purchase (PCP)

A personal contract purchase deal is like a lease, but it offers you the option to buy the vehicle at the end of the agreement. So, you'll pay a deposit, followed by an agreed number of low monthly payments. At the start of the contract, a minimum guaranteed future value (MGFV) for the vehicles is also calculated; this is also known as a balloon payment, and is the amount you'll have to pay to take ownership of the car at the end of the lease.

If you don't want to take ownership at the end of the agreement, you can part-exchange the car for a new model. Better still, if your vehicle is worth more than the MGFV, you can use its full value as a deposit on the next car. But if it's worth less, you still get the MGFV.

The third option is to simply hand back the car to the leasing company. Agreements can also include maintenance of the car.

Pros

- Fixed monthly costs make budgeting easier.

- Requires only a small deposit and lower monthly payments than if you'd bought the car, giving you access to more prestigious models.

- The balloon payment allows you to defer payments and can be refinanced at the end of the agreement.

- If you decide not to buy a new car at the end of the agreement, you can just hand back your car and walk away.

- You avoid the possibility of negative equity - when your car is worth less than the outstanding finance.

Cons

- If you intend to keep the car long-term, a PCP is a more expensive way of doing so than a Hire Purchase (HP) agreement.

- You'll need comprehensive insurance because you don't own the car until the end of the contract.

- Exceeding agreed mileage limits will incur extra costs.

Best for

Having your cake and eating it: drive a more expensive car than you would buy outright, and decide later whether to keep it or hand it back.

Hire purchase (HP) and conditional sale

Hire purchase (HP) is a simple way to finance a new car, because you pay a deposit followed by monthly payments. Only when the agreement has been repaid in full do you take ownership. The cost is based on the price of the car, the size of your deposit and number of instalments.

Pros

- You'll drive a car you couldn't afford to buy outright, knowing that once you've met all the payments you'll own it.

- The loan is secured against the car, which could make it easier to get the finance and at a reasonable interest rate.

- Overall, you'll pay less to own the car than with other forms of finance, but monthly payments will be higher.

Cons

- Until you've paid off the loan you can't sell the car without written permission from the creditor, and if you fall behind with payments the creditor can repossess the car.

- Interest rates can be high, depending on your credit rating. You need to negotiate the best rate and shop around using the APR (Annual Percentage Rate) to compare deals.

- Watch out for hefty 'option to purchase' fees payable at the end of the contract.

- Conditional sale is similar to HP, but there are no added fees to pay, so once you have paid your instalments in full you take ownership of the car without any final balloon payment.

Best for

Driving the car of your dreams. Just make sure you get a good deal by shopping around, comparing the APR and total amount you'll have to repay.

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