Car finance explained: HP, PCP and loans

Most island dealers can arrange finance, and many cars on this site show an estimated monthly cost. The figure that looks smallest isn't always the cheapest deal. This guide explains the three common ways to borrow for a used car, and how to compare them on what they really cost.

The two numbers that matter

Every finance quote must show a representative APR and the total amount payable. The APR is the yearly cost of borrowing, including any compulsory fees. The total amount payable is everything you'll hand over: deposit, every monthly payment, any final payment and fees.

How the money flows

Hire purchase (HP)

You pay a deposit, often around 10%, then fixed monthly payments for a set term, usually two to five years. When the last payment is made, the car is yours. Until then it belongs to the lender, so you can't sell it without settling the finance first.

Personal contract purchase (PCP)

PCP splits the price in two. The lender predicts what the car will be worth at the end of the deal, called the guaranteed future value or balloon payment. Your monthly payments cover the rest, plus interest on the whole amount. At the end you choose:

1. Pay the balloon and keep the carOften a few thousand pounds, which you can pay in cash or refinance.
2. Hand it back and walk awayAs long as you're within the agreed mileage and the car is in fair condition.
3. Part exchange itIf the car is worth more than the balloon, that difference can go towards your next deposit.

Personal loan

You borrow from your bank or another lender and buy the car outright, as a cash buyer. The car is yours from day one, you can sell it whenever you like, and there's nothing to settle with a dealer. Personal loan rates for good credit can be lower than dealer finance, but they depend heavily on your credit record. Use lenders' eligibility checkers, which use a "soft search" that doesn't affect your credit score, before you apply.

Compare the three

Notice how PCP's lower monthly payment usually costs more in total if you keep the car: you're paying interest on the balloon for the whole term.

Your rights with finance

• 14 days to change your mind. You can withdraw from a regulated credit agreement within 14 days. You'll need to repay what you borrowed, plus interest for the days you had it, but you don't need a reason.
• Hand it back at half way. With HP and PCP you can end the agreement once you've paid half the total amount payable, called voluntary termination. If you've paid less, you can pay up to the half way point and then hand it back.
• Extra protection if something goes wrong. Because the lender legally owns the car, it shares responsibility with the dealer if the car is faulty. See your rights when you buy from a dealer.
• You can pay off early. You're entitled to settle early and get a rebate of some interest. Ask the lender for a settlement figure.

Questions to ask the dealer

• What's the total amount payable, and the APR, for this deposit and term?
• Is the price the same if I pay cash? Some deals are only available with finance, and some cash discounts aren't.
• Who is the lender, and is the dealer paid commission for arranging it?
• Are there any fees, such as an arrangement fee or an option to purchase fee?
• For PCP, what's the mileage limit and the charge per extra mile?

Before you sign, add finance to the cost of running the car, so you know the true monthly figure. Every car page on this site has its own finance estimate to start from.