Car finance can be a fantastic way to purchase a vehicle when upfront funds are unavailable, but it’s important to weigh the pros and cons before making a decision.
Whether you’re considering hire purchase (HP) or personal contract purchase (PCP), understanding the full picture will help you make a more informed choice.
What is car finance?
Car finance is an agreement where a lender provides the funds for the purchase of a vehicle, which the borrower repays over time, typically through monthly instalments. The loan can be secured against the car, meaning the lender can repossess the vehicle if payments are not made, or unsecured, where no asset is tied to the agreement.
Pros of car finance
Affordability (over time)
Car finance spreads the cost of a vehicle over several years, making it easier for you to afford. Rather than paying a lump sum upfront, you can break the cost down into manageable payments.
No large upfront payment
Many car finance deals require little to no deposit, meaning you can drive away a new or used car without needing to pay thousands upfront.
Access to better vehicles
Financing allows you to choose a more expensive car that might otherwise be out of reach. Instead of saving up for years, you can drive a newer or better-equipped car much sooner.
Fixed monthly payments
Most car finance agreements offer fixed interest rates, ensuring your monthly payments remain predictable throughout the term of the loan. This makes it easier to budget and manage your finances.
Options at the end of PCP
With PCP, you have flexibility. You can choose to pay the final balloon payment and keep the car, trade it in for a new one, or simply return it without any further obligation.
Improving credit score
Successfully making your monthly payments can help build or improve your credit score, provided you manage the agreement responsibly. This could open doors for better loan terms in the future.
🚗 You might find this guide helpful: How to improve your credit score.
Cons of car finance
Interest costs
Car finance often involves higher interest rates than other types of loans, especially if your credit score isn’t great. Over time, this can significantly increase the total cost of the car.
Debt accumulation
Financing a car means committing to a long-term debt. If your financial situation changes unexpectedly, those monthly payments could become a burden.
Depreciation
Vehicles lose value quickly, and by the time you’ve paid off your loan, your car may be worth significantly less than what you paid for it, especially if it’s financed for an extended period.
Potential negative equity
There’s a risk of ending up in negative equity, where the outstanding loan exceeds the value of the car. This could be problematic if you want to sell or trade the car before the finance term ends.
Restrictions with PCP
PCP agreements usually come with mileage restrictions and wear-and-tear conditions. Exceeding these can result in penalties at the end of the contract.
Risk to your credit score
Missing payments can damage your credit score, making it harder to secure finance in the future. In the worst-case scenario, the car could be repossessed if you fall too far behind on payments.
Ownership delayed (PCP)
With PCP, you won’t own the car unless you make the final balloon payment, so if you don’t want to commit to that, you’ll need to return the vehicle or enter into another finance deal.
Comparison table
| Pros ✅ | Cons ❌ |
|---|---|
| Spreads the cost over time | Higher interest rates than other loans |
| No large upfront payment needed | Long-term debt commitment |
| Access to better vehicles | Cars depreciate, potentially leading to negative equity |
| Fixed monthly payments for easier budgeting | Missed payments can damage credit score |
| Helps build or improve credit score | Potential penalties for exceeding PCP mileage limits |
| Flexible options at the end of PCP (keep, return, trade) | Ownership delayed with PCP |
Additional considerations
1. Flexible financing options: Some lenders provide flexible terms such as payment holidays or early repayment options, which can be beneficial if your financial situation changes.
2. Credit score impact: Your credit score will determine the interest rate you’re offered. Borrowers with better credit scores typically receive more favourable rates, while those with bad credit may find the terms less advantageous.
3. Balloon payments in PCP: PCP’s final balloon payment can be a significant amount. If you plan to keep the car, make sure you’ve considered whether you can afford this payment down the line.
Final notes
Car finance can be a fantastic way to get behind the wheel of a new or used vehicle without the financial strain of a large upfront payment. However, it’s essential to carefully weigh the pros and cons. Consider your long-term financial situation, the total cost of ownership, and any restrictions tied to finance agreements like mileage limits or balloon payments. Always read the fine print and shop around for the best deal.
With careful planning and a clear understanding of the terms, car finance can be a practical and accessible solution to getting the car you need.
🚗 Read more: Do’s and don’ts of financing a car.
