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PCP - Personal Contract Purchase

PCP is a type of secured car finance offered by many car dealerships, high street banks, and specialist lenders. Monthly payments tend to be low compared with other types of finance - so you'll often see dealerships and lenders promoting these deals.

That's because you don't automatically own the car at the end of the term - so you're not paying off the car's full value. Instead, you have the option to purchase the car at the end with a "balloon" payment.

Alternatively, you can return the car and walk away. Lenders may also offer you an "upgrade" near the end of the contract to keep your custom. So it's a great option if you want to drive a new car every couple of years.

However, if you definitely want to own the car outright, a comparable hire purchase deal almost always works out cheaper overall.

With a PCP contract, you're responsible for servicing the car and keeping it in good condition. And the lender will usually impose a limit on the number of miles you can drive - typically between 8,000 and 12,000 per year.

Bear in mind, the best PCP deals usually require a good credit score.

HP - Hire Purchase

With a hire purchase agreement, you own the car outright at the end of the term. It's not necessarily an automatic process; some lenders may require a final fee, but this can be as little as £1.

While monthly HP payments are typically higher than comparable PCP deals, HP works out as a cheaper way of owning the car.  However, you'll have less flexibility than with PCP deals; for example, you won't have the option to upgrade the car towards the end of the term.

The car acts as security on the loan, which lowers the risk to lenders. That's because they can repossess the car and sell it to recover losses if you miss too many payments. On the plus side, the reduced risk often means a lower typical APR. 

HP finance is usually taken over 1-5 years, although available terms differ between lenders. There are no limits on how many miles you clock up.

You'll also likely need a good credit score to access the best HP deals.

PCH - Personal contract hire

Leasing a car could be an excellent option - if you are fine with never having the option to own the car.

It's not quite the same as hiring a car but works in a similar way; you agree to pay to use the car for a set period, then return the car. End of story.

One significant advantage is monthly payments are lower than comparable HP and PCP contracts. That's because you are only paying for the use of the car, not to own it.

Leasing is often used by businesses because of the tax benefits - although personal leasing is becoming more popular. It's a great way of using a car for a year or more at a far lower price than PCP or HP. The disadvantage is if you fall in love with the car, there is no option to own it at the end.

PL - Personal loan

A personal loan may be a good option for financing a car if your credit score is not ideal.

This type of finance is unsecured - so there is no risk of losing the car. Lenders typically mitigate that risk by setting a higher APR (compared with a secured loan).

Getting pre-approval on a personal loan puts you in a similar position to a cash buyer; that could help put you in a strong negotiating position when buying, as you'll be free to buy any car from any dealer.

Due to the vast range of personal loans on the market, bad credit often isn't a huge issue - in particular, a guarantor loan could be a great option if your credit score is low.