Car finance or bank loan: which is best for you?

Our guide to choosing between a loan or finance deal
The pros and cons of PCP, HP, and personal loans
How to work out which is best for your next car purchase

Written by Lewis Kingston Updated: 17 January 2024

Choosing between a car finance scheme and a good old-fashioned bank loan is a common dilemma among modern car buyers. It’s an important decision to get right, because picking the best car finance or bank loan can deliver savings of thousands of pounds over an average three-year deal.

This is primarily because interest rates from manufacturer-backed PCP deals, used car finance schemes, and bank loans, can vary significantly – with APR rates typically ranging from 0% to 10%.

The UK’s most popular form of car finance is something called Personal Contract Purchase (PCP). There’s also Hire Purchase (HP) and leasing (Personal Contract Hire), too.

A PCP contract allows you to run a new car with the option of buying it at the end, giving you flexibility, while an HP deal locks you into buying the car outright. Leasing – PCH – however, doesn’t give you the option of purchasing the car, and is basically long-term renting.

To find out more, and to quickly narrow down your car finance options, read on for our guide on the pros and cons of each method of getting your hands on a brand-new car.

Personal loans

A personal loan lets you effectively buy a car with cash, and you subsequently pay off the loan with a series of monthly instalments to the lender.

One advantage to using money from a personal loan to buy a car means you own it immediately. If you instead used a PCP or HP deal for finance, you’d not own the car until you paid off the entire balance – which could be several years down the line.

Although you will be making monthly payments, opting for a loan to buy a car outright also means you won’t have to put down a large deposit, as you often will if using the other methods.

However, because personal loans are sourced separately to the car, they can prove costly compared with manufacturer finance deals if you are just simply paying the list price of the car.

This is because manufacturers often offer deposit contribution discounts in conjunction with finance deals. These can represent savings of more than £10,000 on premium models that aren’t selling well, and you might struggle to obtain such a discount through other routes.

If you are up for some research and haggling, then a loan will allow you to strike cash deals with a retailer of your choice. This, whether they’re deals made in the dealership or online, could allow you to get a similarly large, if not larger, saving on your new car purchase.

If the savings are similar whether you go for finance or a loan, then compare the APR. The lower the APR, the less interest you’ll pay, keeping your total costs down.

To be sure whether PCP, HP or a loan is the best value for you, compare the total amount payable for the finance schemes with the overall total of all the loan payments if you bought the same car with cash.

Car loans can prove much better value than manufacturer offerings if you plan to buy a car and the manufacturer charges high interest rates and offers small, if any, deposit contributions.

Personal loans pros

Don’t need to pay a deposit
No restrictions on how you drive the car
You will own it outright from the start so can sell or change your car whenever you see fit

Personal loans cons

Likely to be refused if you have a poor credit rating
Interest rates often higher than manufacturer-backed deals
More complicated than getting manufacturer-backed finance

Car finance

Using car finance can be an easy way to get into a new car but there are some big differences between the options available. For starters, one of the major factors that differentiates car finance schemes is whether they let you buy the car at the end.

Personal Contract Hire (PCH) schemes, as the ‘hire’ in the name suggests, don’t give you the option to keep the car once your contract term has come to an end. If you ultimately don’t want to keep the car, and the costs are competitive, a PCH deal is often a quick and affordable way into a new car.

If you actually want to own the car when the agreement draws to a close, or would like the option to buy it outright at the end of your finance arrangement, you’ll be looking at either HP or PCP.

Hire Purchase (HP) schemes are geared up so that once you have finished your monthly payments, the car is yours. In contrast, PCP gives you until the end of the contract to decide whether you want to purchase the car. If you do want to own it, you can make the optional final payment to buy it. If you want to move to a new car, however, you can hand it back with nothing left to pay, provided you’ve stuck to the contracted mileage limit and the car’s in good condition.

The best PCP and HP schemes feature manufacturer discounts, such as deposit contributions and list price savings. Keeping an eye out for these offers could, when it comes to picking new car finance, save you a substantial chunk of change in the long run.

Expect to pay higher monthly payments with HP, as you own the car automatically once you’ve made all the payments. The monthly payments will be lower with PCP finance but, if you want to keep the car at the end of the term, you’ll have to pay the substantial optional final payment.

If you’re sure you want to keep the car once your finance term comes to an end, HP is typically the more cost-effective option, provided both deals feature the same deposit contribution discounts and APR rate. That’s because the higher monthly payments mean you pay off the balance quicker, so interest charges mount up less quickly.

The process of signing up for HP can also be less complicated, as you can do it in the dealership before driving off in your new car – and rates on cars over £25,000 are often lower than you could get with a personal loan.

If you’re struggling to decide between the PCP or HP, it’s worth narrowing down your options to a few cars and then getting quotes for both to see how much difference there is in the total amount payable by the customer to buy the car.

To work out this figure for PCP schemes, add the deposit, total cost of all the monthly payments and optional final payment together, plus any set-up or purchase fees. In the case of HP, add the deposit and monthly payments, plus any other fees, and that’ll be how much you pay in total.

Some car manufacturers offer upwards of 9.9% APR on PCP plans, meaning you could pay thousands in interest alone, depending on the value of the car, so careful consideration is required.

Don’t be immediately swayed by big deposit contributions, either. Check or work out the total amount payable, then compare it with deals offering different APR rates, or against a low-APR loan. If you want to own the car, a personal loan with lower interest charges could prove cheaper in the long run.

Car finance pros

Easier to get if you have a low credit score
Typically lower monthly repayments
0% APR regularly offered

Car finance cons

Deposit required
Car owned by finance company until you make the final payment
Mileage and modification limitations

Car finance vs a loan? Which is best for you?

If you want to own your car from day one, and you have the means to do so, a personal loan is a good option. It gives you access to cash deals that might be available through a dealer or broker, and gives you more freedom with regards to what you can subsequently do with and to the car.

But you might not want to take out such a large amount of money, or you might find it difficult to do so. Choosing a loan to finance your car also means you might miss out on a number of great-value manufacturer offers. In these instances, opting for a PCP or HP deal can prove to be the better and more accessible choice.

Acquiring a car using PCP, as well as often offering lower monthly costs, also means you can hand the car back at the end of the contract if you decide you don’t want to keep it. This can make it a more desirable and safer-feeling option than HP or a personal loan.

Even so, it’s worth keeping an eye on the final payment figure for any PCP deal, and bearing it in mind, just in case you do want to keep the car in the end.

Using PCP also means, compared to a loan or HP, that you won’t have to get involved with selling or part-exchanging your car at any point. You simply drive it, hand it back at the end of the term if you’re not interested in it, and pick out something new.

If, however, the manufacturer charges a high rate of interest and doesn’t offer large finance incentives, you could be quids in by choosing to get a loan rather than going for one of the manufacturer offerings. Tot up the total cost of both options – accounting for any set-up charges or car company discounts – and you should be able to see which option will cost you less.

Or, if the numbers stack in its favour and you’ve no long-term ownership in mind and want minimum fuss, you could consider just leasing a car. It could be cheaper, and less restrictive, thanks to options such as short-term leases. Just remember, in any case, to look carefully at the total costs and conditions of any offer to make sure you’re getting the best hassle-free deal for your money.