All the types of car finance explained 

Car finance is meant to help you as it’s a useful way to spread the cost of a purchase over several years. However, there are lots of different ways to finance a car purchase, which makes it difficult to know where to begin. So, in this article, we explain the different car finance options and help you decide which is the best for you. 


Before introducing the car finance credit options, it’s worth thinking about buying your next car with cash. Of course, not everyone is able to pay cash for a car, but if you have the savings available, it is typically the cheapest way to buy a car. After all, you don’t need to worry about any monthly payments or interest charges in the future, and you own the car outright from the moment you make the payment. 

Personal loan 

Another simple way of buying a car is via an unsecured personal loan. Personal loans are extremely straightforward and easy to apply for. You decide how much money you need to borrow, submit an online application, and use the money to buy your car. Then, you are required to pay back the loan over an agreed period of time, plus interest. You need to agree to the payments in advance, so you know exactly what you need to repay and when. Another advantage of personal loans is that you get to own the car right away, which isn’t the case with other finance options, as we explain below. 

Personal contract purchase (PCP) 

To buy a car with a PCP, you need to make an initial deposit followed by monthly payments over a stipulated number of years. At the end of the agreement, you can return the car and walk away or make a final balloon payment to keep the car. You could also take out a new PCP deal when your current one ends. PCP can be cost-effective, as you know that you’ll be able to return the car at the end of the agreement. However, the biggest drawback to a PCP is that you don’t actually own the car until you make the balloon payment at the end of the term. 

Hire purchase (HP) 

Hire purchases are a little easier to understand than PCPs. After making an initial deposit, you are required to pay a monthly instalment for the vehicle. At the end of the agreement, there is no balloon payment to think about, and you will own the car once all the payments have been made. One thing to note about HPs is that they usually come with higher monthly payments than PCP deals. 

Credit card 

In some instances, you might be able to buy a car with a credit card. If you have recently taken out a credit card with a 0% interest period, this can be a really affordable way of buying a car. However, not every seller accepts credit cards as a form of payment, and credit cards often have a limit of around £5,000. As such, you won’t be able to use a credit card when buying a car that is worth more than this. 

Part exchange 

While it’s not strictly a car finance option, many dealers allow you to trade your car in for a new one, which reduces the price you need to pay for the new vehicle. The main issue with part exchange is that you have to negotiate with the dealer in terms of the worth of your car, which makes the whole transaction slightly more complicated. 

Personal contract hire (PCH) 

A PCH isn’t actually a finance deal – it’s a long-term rental, and you never get to own the car. When you take out a PCH, you pay a fixed amount to borrow the car over a designated period of time, and when the contract is up, you give the car back. This is an attractive option for people who enjoy driving new cars, but you need to keep the car in good shape and have to stick to the mileage limit. 

Adding to your mortgage 

Did you know that you can add to your mortgage and use the extra funds to buy a car? This is a practical option if you’re buying an expensive car. However, you need to be mindful that your mortgage debt is secured against your home, and if you fail to make the repayments in full, your home is at risk. 

The verdict: Which is the best way to buy a car? 

While all of the above options are viable, cash is arguably the best way to buy a car. However, if you need to finance your car with credit, we’d recommend taking out an unsecured personal loan, as it’s easy to apply for, affordable, and allows you to own the car outright from the very start of the arrangement.  

If you would like to learn more about how to finance a car, take a look at the Debt Consolidation Loan Calculator over on the Koyo Loans website.

Written by Mia

Hey Everyone! This is Mia Shannon from Taxes. I'm 28 years old a professional blogger and writer. I've been blogging and writing for 10 years. Here I talk about various topics such as Fashion, Beauty, Health & Fitness, Lifestyle, and Home Hacks, etc. Read my latest stories.

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