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Hire Purchase, PCP Finance, Or Loan: Which car finance option is best for you?

You've just picked out your dream car. You've taken it for a test drive and you've chosen the colour. You're even considering buying a pair of leather driving gloves to go with it.

The only thing left is to decide which car finance option's best for you.

So we've put together a short guide on the different car finance options and deals you might consider when buying a new car.

If you're looking to get a loan to buy a new car, why not consider getting a loan with Monzo?

Answer three quick questions to see if you can get a loan with us. Then we’ll show you what you could borrow and how much it’ll cost you, all without affecting your credit score.

If you're eligible, we offer 3.7% APR representative on loans of £7,500 to £15,000, and 19.5% APR representative on loans up to £7,500.

What is a car finance loan?

You can take out a car finance loan specifically to buy a car. Cars can be big purchases, so spreading out the cost over a couple of years can sometimes be the best option. Like all loans, they’ll come with interest rates, and some lenders may charge you additional fees to pay back the loan early.

When you're looking to finance your car, there are generally three different options

1) A personal loan

One option could be to take out a personal loan.

In this case, you'd apply with your bank or building society to borrow a set amount of money. Then you'll make monthly repayments to pay back the amount plus interest, depending on the annual percentage rate (APR) the lender offers you.

If you have a good credit history and your bank sees you as a responsible borrower, a personal loan could be the cheapest option for buying a car.

Also, your finance agreement is with the bank that lends you the money. So as soon as you pay the dealership, you own the car outright. This can give you more flexibility versus other contract options, as usually the dealer will still legally own the car until the amount is paid in full.


  • If you can't buy outright with cash, this can often be the cheapest alternative.

  • With Monzo, you can apply in the app within minutes and receive the money the same day if you are eligible.

  • Flexible amount - you only borrow what you need.


  • Some loan providers take a while to send you the money (but Monzo will send you them on the same day).

  • Taking out a loan will show on your credit history - which might affect you borrowing money in the future

2) A hire purchase

Another option is a hire purchase, sometimes referred to as an HCP. Here you're making monthly payments to the dealership itself.

Bear in mind, you only own the car outright after the final payment – until then the finance company you made the agreement with does.

There's also is usually a deposit to pay before you can drive off with your new car. This is usually 10% of the hire agreement. But if you can put down a bigger deposit, you'll have less to pay each month.

If you're looking to get a car on finance, but only need a small amount to cover the difference between what the car is worth and what you've saved, this could be a good option.


  • Easy to arrange - you can usually sort it out with the dealer the same day.

  • Flexible repayment terms (from 12 to 60 months).

  • Fixed interest rates - no nasty surprises.


  • You don’t own the car until the final payment.

  • Can often be more expensive if you have a small deposit, or looking for a short-term arrangement.

3) A personal contract purchase (or PCP)

The third option is a personal contract purchase, which is sometimes abbreviated to PCP. A PCP acts in the same way as a hire purchase. You can put down a deposit and make monthly payments. And the bigger your deposit is, the smaller those payments are.

But the monthly payments are usually lower than other car finance deals, as you don't automatically own the car at the end of the purchase agreement. Instead of paying the value of the car brand new, the amount you're paying is the value of its 'depreciation' at the end of the contract.

What's the value in that?

Well, a car loses value almost immediately. A brand new car can lose as much as 20% of its value as it drives out of the dealership. So why should you still be paying the full value of the lease at the end of the agreement if you're financing your car?

With a PCP, you have a choice at the end of the agreement: you can pay off the rest of the car's value and keep it, you can return it, or you could take out a new contract purchase and get another new car. The final payment you make at the end of leasing a car is the one that lets you keep it. It's sometimes called a "balloon payment".

Of course the disadvantage is that you still don't fully own the car unless you pay off the full amount, like with a hire purchase.


  • Lower monthly payments than a hire purchase.

  • Flexible repayment terms (from 12 to 48 months).

  • The choice to keep or trade-in the car at the end of the contract.


  • There's usually restrictions on the types of car you can get, plus an annual mileage limit. And if you exceed that, the penalties can be severe.

  • The dealership owns the car. So if you return it with damage to it, you'll have to pay the bill.

  • You have to pay the outstanding balance to keep the vehicle, making it a complicated way of buying a car.

Car finance deals - what to look out for

So there are three main finance options you can use when buying a car.

Whatever option you decide to use, there are a few things that might be helpful to keep in mind, whichever one you choose.

  • Work out a monthly payment you can comfortably afford across the entire term of the loan. Give yourself a bit of wiggle room if you can, just in case your financial situation changes down the line.

  • Look at all the costs of the financing. It's just not just your monthly repayments - look out for any arrangement fees, early repayments fees etc. and make sure you can always afford to pay.

  • Weigh up the benefits of additional protection and cover and see if it's worth it. PPI - payment protection insurance (remember that?) and GAP cover are two usual up-sells from a dealer. They might sound good, but the cover can be limited.

  • Where possible, using cash when buying a car is always the cheapest option. Personal loans are usually the cheapest way to borrow to buy. But you'll need to have a good credit rating to do that.