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Car finance explained: the ins and outs of getting credit


When it comes to car payments, you have several options. With all the ins and outs of complicated credit contracts, the options can seem pretty overwhelming. As students tend to have wildly differing financial situations, this article will break down the different kinds of car credit, looking at pros and cons, so you can decide which one suits your situation.

Hire Purchase

Alongside getting a loan, this is probably the easiest method. Its simplicity is one of its advantages. HP involves putting down a deposit on the car before meeting the remainder through set monthly payments. The deposit is usually around 10 percent of the full cost, while interest is generally set at between 7 and 13 percent APR. One downside of HP is that, unlike with a bank loan, you don’t own the car until you complete the payments – but it will suit those who have plans (like starting a family) that could affect their disposable income.

Personal Loan

This is the most popular method, because – as with HP – it doesn’t require you to meet the full cost upfront; but unlike with HP, the car is legally yours as soon as you make the initial payment. Again your monthly payments will be fixed, although the APR rate can vary (so you should be clear what this is before signing anything). This is a great option for those who want to own their car immediately and intend to hang onto it. A negative is that it could be repossessed if you are unable to meet payments, due to changes in circumstances – so don’t choose it if your finances fluctuate.


Personal Contract Purchase

Like HP, PCP involves placing a deposit before paying the rest monthly. APR levels are similar too (typically between 7 and 14 percent), but the big difference is that you have three options at the end: you can return the car, keep it or trade it. Thus it suits people who know what their financial situation is likely to be during the term and who feel that they may not keep the car permanently. Opting for a PCP plan means you could trade in for something else if you fancy – check the new Kia Rio here, for one example of what’s out there.


This really amounts to renting, rather than buying, and involves paying set monthly sums for the use of the vehicle for the duration of the contract. On the plus side, these payments are generally lower than with loans, HP or PCP (anywhere from £100 to £400 is standard), and it leaves you free to choose something else at the end. The negatives are that you don’t actually own it at any point, and you will face restrictions on mileage. This is a good option to choose if you have less disposable income and a clear idea of how much you will use the car.

As the cost of driving and owning a car continues to creep up, utilising any of these solutions can give you more freedom and flexibility without cutting a huge chunk out of your savings. There is no single best form of car credit, each one has its plus points depending on your situation.