Car finance explained

I want to buy a car – what are the different types of finance options available to me?

Whether you’re buying new or used, a car is a significant purchase. You can, of course, buy your next car outright if you’re lucky enough to have the funds available, but most people need to rely on a finance option. There are four main types of car finance available:

• Hire purchase (HP)

  This is similar to PCP, in that a deposit is required, and there are fixed monthly payments. The car is owned by the HP company, and you are essentially only hiring it until you make the final payment. After this time, you own the car. Hire purchase is the only finance option offered by AA Car Finance.

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• Personal loan

  One of the most popular ways to finance a new car. This involves borrowing money to fund the purchase, often from a bank or building society. When you buy the car, you instantly own the car. You then pay the loan back to the lender, with interest on top, over a time period to suit you. The amount of interest varies from lender to lender and usually depends on the duration of the loan, as well as your personal circumstances and credit score. This option is particularly good if you’re in it for the long haul and don’t intend to change cars very often.

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• Personal contract purchase (PCP)

  Here, you pay a deposit (usually around 10%) and then have fixed monthly repayments. During the contract, the car belongs to the finance company and your payments only cover depreciation. This type of car finance is ideal if you’d like flexibility at the end of the agreement, and also suits those who like to change and update cars fairly regularly. Once your contract ends, you have three options:

  1. Pay the remaining value of the car (often called a balloon payment) and keep the car
  2. Exchange the car
  3. Return the car to the supplier
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• Leasing

  When you lease a car you’re essentially renting it, so you’ll never own it. You don't have the option to buy the car at the end of the contract. However, every two to three years you can change the car you’re driving. This is a great way to drive cars you couldn’t usually afford to buy. The payments you make are like a hire fee – they simply cover the car’s depreciation.

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