The best ways to finance a car

With so many options available to you when it comes to financing a car, how do you know where to start? Finance is now a preferred method of purchasing a car in the UK, so if you’re considering financing your next new or used car, then we can help.

Here at Octane Finance, we are best placed to help you make the right decision. We proudly provide market leading car finance to customers through our extensive panel of lenders. To steer you in the right direction, we explain the best options for financing a car, so read on to find out more… 

What are the different car finance options?

What is the best car finance option for you? To help you decide, we’ve explained the different types of finance available in the market right now:  

Personal Contract Purchase (PCP)

What is Personal Contract Purchase car finance?

Personal Contract Purchase (also known as a PCP) is a flexible form of car finance that is similar to a Hire Purchase plan, but can offer even lower monthly repayments. Think of this option as a loan to help you purchase the vehicle, the only difference being that you won’t need to pay off the full value of the car in full. For this reason, PCP proves a popular choice of car finance which is especially preferable if you like the idea of changing your car regularly. 

How does Personal Contract Purchase car finance work?

Personal Contract Purchase (PCP) allows you to own the car at the end of the agreement if you wish, or you can give the car back. If you choose to keep the vehicle, you’ll be required to make a balloon payment (lump sum) at the end of the term so you officially own the car. If you’d prefer to give the vehicle back, then you can use any equity you may have as a deposit on a new car instead.

A PCP agreement is based upon three key components:

1. The upfront deposit amount
2. The amount you need to borrow
3. Whether you want to own the vehicle, exchange it, or return it at the end of the agreement

The flexibility of the finance deal lies within the options available to you as a motorist; you can choose the upfront deposit you wish to put down - this is usually around 10% of the value of the car. The finance lender can then calculate the amount you’ll need to borrow, which will be paid back over monthly instalments - usually between 24 to 36 months. 

At the end of your PCP agreement, you’ll be presented with a number of options, including full ownership of the vehicle, part-exchange or return. If you choose to keep the car, you’ll need to pay the agreed balloon payment based on what the vehicle is worth at the end of your agreement - this may also be referred to as the Guaranteed Minimum Future Value (GMFV). 

What are the pros and cons of Personal Contract Purchase car finance?

A PCP car finance agreement is designed to benefit motorists with very good credit history, allowing for lower monthly repayments compared to a Hire Purchase agreement. However, do bear in mind that the total amount you pay back for the car may be higher on a PCP. As with any finance agreement of this kind, your car could be repossessed if you fail to keep up with the agreed monthly repayments.  

Before you make a decision, it’s important to understand the positives and negatives of a PCP deal:

Hire Purchase (HP)

What is Hire Purchase car finance?

Hire Purchase (also referred to as HP) is a popular form of car finance that allows you to pay for a vehicle over a set period of time. The difference between Hire Purchase and Personal Contract Purchase, is that with HP, you are simply paying to ‘hire’ the car from the finance lender, so you will only have the option to own the vehicle once all the repayments are made. HP also proves to be another flexible finance option for motorists thanks to the varied repayment terms.

How does Hire Purchase car finance work?

Hire Purchase (HP) is a great option if you wish to own a vehicle in the long-run, but don’t have the funds to purchase a car outright. With HP, you will be required to make an upfront deposit (usually around 10%) and will agree fixed monthly payments with the lender over a set period of time. You’ll also benefit from the certainty of a fixed rate interest at the beginning of the term. 

Unlike a PCP agreement, HP won’t restrict your mileage allowance and you’ll have the option to settle the loan early if you wish too. If you have a car for part-exchange, you can trade it in and use the funds as an initial deposit. 

What are the pros and cons of Hire Purchase car finance?

An HP car finance agreement is a great option if you’re looking to drive a brand new car, which is why typically, Hire Purchase deals are usually only offered on cars worth £10,000 or more.   As with any finance agreement of this kind, you could lose the car if you fail to keep up with the agreed monthly repayments.   

Before you make a decision, it’s important to understand the positives and negatives of an HP deal, as outlined below:

Lease Purchase (LP)

What is Lease Purchase car finance?

Lease Purchase (also called LP) is similar to a Hire Purchase agreement, but with the added element of a balloon payment at the end of the term. Considered the better option for motorists looking to invest in a more premium car (such as a supercar), LP is generally used to finance cars worth at least £25,000 or more. Unlike HP and PCP, when you enter into a Lease Purchase agreement, you are automatically required to purchase the car.

How does Lease Purchase car finance work?

A Lease Purchase (LP) agreement requires you to put down an initial deposit (recommended at least 10%) which will help determine the loan amount from the lender. Your monthly repayments may be variable and can typically last between 24 months and 60 months, depending on your requirements. 

As mentioned, when you enter into an LP car finance contract, you won’t have the option to end the agreement early, or give the vehicle back. Instead, this is a deal with ‘a view to buy’, so you’ll be required to purchase the vehicle at the end of your term via a predetermined balloon payment. However, you may be able to refinance the balloon amount or sell the car to a third party to cover the final lump sum. 

What are the pros and cons of Lease Purchase car finance?

Lease Purchase is an ideal option if you wish to purchase a supercar or premium brand vehicle, so this form of finance isn’t as commonly used as Hire Purchase or Personal Contract Purchase agreements. When you enter into any type of finance agreement, the car can be seized by the lender if you fail to make the agreed monthly repayments.   

Before you make a final decision on the best car finance option for you, it’s important to understand the positives and negatives of an LP deal, as outlined below:

Is it better to get a car on finance?

Purchasing a car on finance is widely becoming the preferred option for many motorists in the UK. Whether you’re looking for a new or used car, applying for finance can prove a more cost effective way of investing in such a pricey purchase. But what are the benefits of financing a car? Below, we’ve listed the top 10 reasons to buy a car on finance:

1. You don’t have to pay a deposit. Many lenders now offer zero deposit finance options which means you don’t need to put down an initial upfront payment. Head over to our Zero Deposit page to find out more. 
2. You can manage your monthly finances. Flexibility in terms of the length of contract means you can effectively forecast your monthly payments to a budget that suits you. 
3. Your credit score doesn’t have to be perfect. Poor credit score? No problem! With these ever uncertain times, more and more lenders are specialising in support for those with bad credit. Check out our Bad Credit page to explore your options. 
4. You can part-exchange your current car. If you have a vehicle you’re hoping to sell, you can offset it against the deposit for a new car. 
5. You can use your financed car as a deposit for a new one. Assuming you can purchase your car at the end of your finance agreement, you’ll be able to use it as a deposit against a new one - as long as the car is worth more than any outstanding finance owed. 
6. You can drive a better car. Due to the lower monthly payments, you can benefit from driving a higher spec model of car at a more favourable price than if you were to purchase it outright. 
7. You can change your car more frequently. As well as benefiting from driving a higher spec model of car, you have the ability to change your car more often too.
8. You will help improve your credit score. Applying for credit, such as car finance, will help your overall credit rating in the long-run.
9. You can claim the tax back on car finance. If you are a company owner and use the vehicle for business purposes, the car finance costs may be tax deductible. 
10. You can source a guarantor to access car finance. If you’ve been refused car finance in the past due to bad credit history, you may be able to use a guarantor to help get you across the line.     

When applying for finance, you’ll want to ensure you have a good to excellent credit score to boost the chances of your application being accepted straightaway. If you’re concerned your credit score falls below par, take a look at our ‘How to improve your credit score’ blog to find out how you can increase your overall credit rating, or read our ‘What to do if you’re refused car finance’ blog if you find yourself in this position.     

Why choose Octane to fuel your car finance?

Get fuelled with car finance the Octane way! Our experienced and dedicated team work with you to find the best finance solution possible, depending on your circumstances and requirements. Our extensive panel of lenders offer PCP, HP and LP finance with zero deposit options, as well as specialising in offering finance to those with bad credit too. 

Finance your next new or used car in three easy steps:

1. Get approved
2. Choose your car
3. Sign the agreement and get ready to drive!

Discover how much you can borrow to purchase a new car by using our online Finance Calculator which compares Personal Contract Purchase and Hire Purchase deals. Why not contact us to speak with one of our expert team and explore your options further - we’ll be only too happy to help!