Other than your home, a car is one of the most expensive purchases you’re ever likely to make. So the question of how to pay for a car is an important one - and the answer, at least at first glance, is: “it’s complicated”.
However, once you understand the options that are available to you, it’s actually possible to use this complexity to your advantage: with so much choice out there, there’s likely to be a perfect option for you.
In this article, we’ll clearly explain the different options out there, from car loans to PCP deals, so that you’re able to choose the best possible way to fund your new or used car purchase.
One of the options we’ll cover is a personal loan: if that’s what you’re after, and you want to borrow £1,500-12,000 to finance a car, you can take a look at our loan calculator or make an application at www.koyoloans.com (representative APR 27%).
Otherwise, read on!
Is it a good idea to buy a car on finance?
Before we get into different types of car finance, let’s start by looking at the bigger question of whether finance is a good idea in the first place.
Almost any form of car finance has a monetary cost - usually that’s in the form of interest - meaning that it’s more expensive to buy a car on finance than it would be to buy one with cash or savings.
On top of that, some forms of car finance (which we’ll cover below) have other strings attached - for example with a PCP deal, you’ll have mileage restrictions, and limits on wear and tear - which some drivers don’t want.
So why would anyone bother getting car finance?
Car finance isn’t something you should use to buy a car that’s simply unaffordable, or out of your price range - rather, it’s a way to spread the cost of a very large purchase over a longer, more manageable period.
To give a very simple example, few people would be able to put their hands in their pockets and pull out £10,000 to buy a car, but spreading that cost over three years would bring the monthly cost down into the low hundreds.
So if you’re considering buying a car on finance, ask yourself:
Could I afford to buy the car outright, saving myself money on interest payments?
✅ If so, buying with savings is likely to be the better option.
🚫 If not, ask yourself:
Could I comfortably afford the monthly payments?
💡 If you could, car finance could be a suitable way for you to fund your vehicle.
We’ll now cover the options available to you.
7 different ways to pay for a car
As we’ve mentioned above, paying for a car using your cash savings is the cheapest and safest option out there. However, not everyone has enough money saved up to buy a car outright, which is why finance options exist.
It’s worth noting that even if you don’t have enough money to fund 100% of the total of a car, you can still use savings to fund a portion of your purchase. For example, if you want to buy a car worth £10,000 and have £5,000 in savings, you’ll repay considerably less if you borrow £5,000 and fund the remainder with your savings than if you were to borrow the full amount.
Borrowing from friends and family
Borrowing from friends and family is a loaded topic, which probably deserves an article of its own.
If you’re lucky enough to have friends or - more typically - family who are willing to lend you the money to buy a car, then this could be a good option, particularly as they’re less likely to charge you interest.
However, borrowing from people you know can put significant strain on your relationship. It’s worth really thinking this through - particularly what would happen if you were unable to repay the loan - before you commit to anything.
An unsecured personal loan (so called because it’s not “secured” against your house, unlike a mortgage) is a simple, straightforward way to borrow a fixed amount of money, which you repay in monthly installments over an agreed period - £5,000 for three years, for example.
The advantage of buying a car with a personal loan - relative to other options such as PCP which we’ll cover later - is that you own the car outright from day one. That means it’s yours to use as much as you like, sell whenever you want, and treat as you please.
The trade-off for this flexibility is that personal loans tend to have a higher interest rate than other forms of finance.
There are lots of different lenders out there: for example, Koyo offers Open Banking loans, using Open Banking technology to focus on affordability rather than just credit scores.
It’s also possible to buy a car using a credit card. Unlike a personal loan, you can pay off a credit card pretty much whenever you like, so long as you make the minimum payment each month. However, if you fail to pay the balance off in full each month, you’ll usually face a comparatively high rate of interest - which really adds up if you let it roll.
It’s also worth noting that credit cards generally have credit limits in the thousands, making them unsuitable for all but the cheapest credit card purchases. On top of this, some dealers may choose not to accept credit cards, because of the high fees that providers charge them.
Personal contract purchase (PCP)
PCP deals are where things get a bit more complex. Rather than borrowing cash to buy a car, with a PCP deal:
You pay a deposit (usually a lump sum equivalent to 10-20% of the value of the car) and drive away
You make fixed monthly payments for an agreed period (typically 3 years)
At the end of the period, you have the choice of making a final balloon payment to the car dealer and driving away or simply giving back the keys (in which case you pay nothing further)
Until you make that final payment, the car doesn’t technically belong to you. That means you face restrictions: notably, you need to keep it in good condition and must stick to a mileage limit.
With those extra restrictions, why would anyone bother? Well, there are a couple of key advantages:
Monthly payments tend to be lower - that’s because of the larger payments at the beginning and end of the agreement (if you keep the car)
The flexibility at the end of the agreement is nice to have - if you’re done with the car, you don’t have to worry about selling it
Because of that, if you want to avoid the hassle of selling a car, or are worried about how much of the cost of the car you’ll recover when you do so, then PCP could be a good option.
Want to know more? Check out our guide to PCP vs bank loans.
Hire purchase (HP)
Hire purchase is similar to PCP but slightly simpler: you pay a deposit, followed by fixed monthly payments. Once you’ve made the last payment, the car is yours to keep - there’s no balloon payment to make to a dealership (and nor is there an option to give the car back).
As a result, payments tend to be higher, and the same restrictions apply: return the car with bumps and scrapes or having exceeded the mileage limit and you’ll face a hefty fee.
Personal contract hire (PCH)
PCH deals are effectively long-term rental agreements, where you take out a lease on a vehicle and make fixed monthly payments. At the end of the term, you give the car back - so the monthly payments are roughly equivalent to the depreciation of the car over that period, plus interest.
PCH is generally used by buyers who want to bounce from one new car to another - once an agreement finishes, they can move straight onto the next one. However, as with PCP and HP deals, you’ll face restrictions on mileage and wear and tear, and wouldn’t be able to sell the car (unlike if you had bought with cash or a personal loan).
Could you avoid buying a car in the first place?
For some of us, a car is a necessity: if you spend your days driving around for work and your weekends acting as a taxi service for family members, you can probably skip this section.
However, if your use for a car is more occasional - for the weekly shop or the odd day trip, for example, it could be worth considering whether you actually need to own one.
If you live in a city in the UK, you could look at the various short-term car hire schemes around you - Zipcar, Hiyacar, and Ubeeqo are probably the best known - which allow you to rent a car by the hour. If you only use a car from time to time, that’s likely to save you money.
Hopefully, this article has answered your questions (but if not, we’ve got an FAQ section below).
To summarise, there are lots of different options out there: some (such as buying with cash, a credit card, or a personal loan) mean you own the car outright from the start, and others (PCP, HP, PCH) mean you don’t own the car until the end of the agreement - if at all.
The important thing is to consider how the total cost of each option compares, and which payment option is most affordable for you - e.g. whether you’d find it easier to pay a large deposit at the start, or would prefer regular monthly payments.
Then you’ll be armed with the right information to start comparing car finance deals!
If you’re looking for a flexible personal loan of £1,500-12,000 to finance a car, you can take a look at our loan calculator or make an application at www.koyoloans.com (representative APR 27%).
Frequently asked questions about how to pay for a car
What is the best way to pay for a car?
There’s no one-size-fits-all answer, but the key things you should consider are:
Which option has the lowest total cost after factoring in things like interest payments, fees, etc?
Which option is most affordable (e.g. could you afford an initial deposit?)
To illustrate this point, take a look at how the payments on two different options (personal loan and PCP) compare:
What's the safest way to pay for a car?
The safest way to pay for a car is with savings since you don’t have to worry about making future repayments. All forms of finance carry risk, so when considering using finance to buy a car, you should think very carefully about your ability to afford monthly repayments, in particular, if your circumstances were to change unexpectedly.