As list prices have soared in recent years, car finance schemes have surged in popularity as they are often the most affordable way to acquire a new car. Rather than forking out a large lump sum for the full cost, finance plans enable consumers to split the price of their new car into a series of significantly smaller monthly payments.
There are inevitably extra costs added to monthly payments including transaction fees and, of course, interest. But there are ways of reducing those costs, and the size of the monthly payment, if you shop smart. Looking out for zero deposit and 0% APR deals is a good start. It also helps to go for cars with a low rate of depreciation.
In this guide, we’re going to explain everything you need to know about car finance monthly payments to help you shop around for the best deal.
What types of car finance are available?
All car finance deals are the same in that you pay a certain amount every month for the use of your car. However, there are different types of car finance available that suit different needs. Below, you’ll find a brief explanation for each one and a link to a more detailed article on the Parkers website.
Personal contract purchase (PCP)
PCP is the most popular form of car finance. To secure a deal, you pay a deposit and a series of monthly payments over a term that’s usually between 24 and 48 months. At the end of that period, you have the option of making a final ‘balloon’ payment to keep the car, or you can return it to the finance company.
PCP payments are relatively low because you’re only paying the cost of the car’s depreciation. However, you don’t actually own the car, unless you make the balloon payment. Read more about PCP car finance.
Personal contract hire (PCH)
Also known as leasing, a PCH deal can also be a highly cost-effective way of getting yourself into a new car. By leasing, you’re essentially renting the car for an extended period of time.
The payments are generally pretty low but there are strict mileage limits, you don’t technically own the car and there’s no option to buy it. Read more about PCH leasing.
Hire purchase (HP)
Unlike PCP and PCH deals, if you pay for a car through an HP agreement, you actually own it. The monthly payments are higher, but that’s because you’re paying off the whole cost of the car, plus interest. There are no mileage limits and you have the option of paying off the balance at any point during the contract term. Read more about HP finance.
Personal loan
All the forms of car finance mentioned above are usually obtained through a dealer or specialist car leasing company. There’s nothing to stop you taking out a personal loan from your bank or another financial institution, though. You own the car outright from the start and there are none of the fees that are often added to PCP, PCH and HP deals. Find out more about buying a car with a personal loan.
How do monthly payments work?
Each form of car finance described above works slightly differently. You’re paying for different things with each one in how the cost of the car is broken down, the amount of interest you pay, any mileage limits that apply and any fees that have been added. Ultimately, though, the payment is always drawn from your bank account by direct debit on the agreed date for the duration of the finance term.
What is the average monthly payment on a car in the UK?
There isn’t a figure that can be definitively called the average monthly cost of a car in the UK. Various institutions have looked into it over the last couple of years and come up with numbers ranging from about £220 to £400 per month. We can’t comment on the accuracy of those numbers, but the upper end of that range seems plausible for new cars.
How much should you spend on car finance a month?
You should only ever spend as much on monthly car finance payments as you think you can comfortably afford. Many financial experts suggest you shouldn’t spend more than 10% of your net monthly earnings (after tax and deductions), but there’s nothing to stop you spending more than that, or less. It entirely depends what kind of car you need. If you need to upgrade from a small hatchback to a big family SUV, you’ll inevitably have to spend more on the monthly payments.
Don’t stretch yourself too thin, though. And remember that the temptingly low advertised monthly payment for a particular car could increase with extras, fees and more a suitable mileage limit.
Can I get a car for £300 a month in the UK?
Shop around and you’ll find loads of new cars available for £300 a month on some sort of finance deal. Keep an eye on the Parkers Deal Watch page for our pick of the week’s best finance deals. Be sure to read the small print, though. Deals with low monthly payments often require a large deposit and have low mileage limits.
You’ll find many more used cars available for £300 a month. Indeed, that amount will buy you just about any type of car you want, if you’re happy to get something that’s a bit older.
What is a good rate for car finance in the UK?
At the time of writing, the Bank of England’s base interest rate is 5.25%. If you can secure a finance deal with a lower added percentage rate (APR), you’re doing very well. Fortunately, there are plenty of low rate deals available. Otherwise, expect to pay interest at a rate of six to 12%.
