Most new and nearly-new cars in Britain are bought on finance, and the great majority of that is PCP. The monthly figure in the advert is built to look affordable. Whether the deal actually is depends on the parts the advert leaves out: the total you repay, the interest rate, and what you own at the end.
There are only three ways to pay for a car, and the right one depends less on the car than on how long you keep it and what your savings are doing. All three, when borrowed, are regulated by the Financial Conduct Authority, so if a deal is sold to you, you have rights.
Hire purchase: borrow, then own
HP is the straightforward one. You put down a deposit, borrow the rest, and repay it in equal monthly instalments with interest, usually over two to five years. The car is the security for the loan, so the lender legally owns it until your final payment clears.
What you get for the higher monthly
The monthly payment is higher than PCP because you are paying off the car's whole value, not just the slice it loses to depreciation. In return there is no sting at the end: no balloon, no mileage limit, and the car is yours the moment the last instalment lands.
Who it suits
People who keep cars for years and want to own one outright. If you drive a car into the ground, HP almost always works out cheaper than rolling PCP deals, because you stop paying once it is yours.
PCP: the one most people are on
PCP splits the car in two. The lender estimates what it will be worth at the end of the deal, the Guaranteed Future Value or "balloon", and you finance only the gap between today's price and that figure, plus interest. You are paying for the depreciation, not the car, which is why the monthly payment is lower.
Your three choices at the end
When the term ends you pick one of three. Pay the balloon and keep the car. Hand it back and walk away, provided you are inside the agreed mileage and it is in good condition. Or, if it is worth more than the balloon, put that difference towards the deposit on your next one.
Where PCP catches people out
The third choice is the business model: roll from deal to deal and you are in a monthly payment that never ends, never owning a car. The specific traps are the mileage limit, which charges you per mile if you go over, "fair wear and tear" charges levied on hand-back, and the risk that the car is worth less than the balloon, so buying it makes no sense and the equity you were counting on is not there.
Paying cash: usually the cheapest
Cash removes the interest, so the decision comes down to one comparison: does the finance APR cost more than your savings earn? If the rate is 8% and your savings make 4%, borrowing costs you the 4% gap on the amount financed, and cash wins.
When cash is not the answer
Two cases flip it. A genuine 0% deal is free borrowing, so take it and keep your money earning interest. And a manufacturer deposit contribution, effectively a discount you only get if you finance, can be worth more than the interest you would pay.
One caution either way: do not drain your savings for a car. Keep an emergency buffer. A slightly dearer finance deal is far cheaper than borrowing at credit-card rates when the boiler goes.
How to read a finance deal
Compare the total amount payable and the APR, never the monthly figure alone. Two deals with an identical monthly payment can differ by thousands once you add up the term and the balloon. Watch the add-ons sold alongside, GAP insurance and paint protection especially, which are often marked up heavily against buying them separately.
If you took a deal before 2021, check the commission
The FCA is reviewing "discretionary commission" arrangements, where dealers could quietly raise your interest rate to earn more, on finance arranged before 28 January 2021. If that is you, it is worth seeing whether you can complain: the FCA's car finance complaints page explains who is affected, and Citizens Advice covers your rights, including ending a deal early.
The car matters more than the finance
A good rate on a bad car is still a bad buy. Before you sign, check the exact car: a free MOT history check shows how it has held up and flags a wound-back odometer, and our reliability pages show how the model fares at MOT as it ages. On a PCP especially, mileage and condition decide what you are charged at hand-back, so clocking cuts both ways.
Common questions
Can I end a car finance deal early?
Yes. Once you have paid off half the total amount payable, the Consumer Credit Act lets you hand the car back and walk away, called voluntary termination, with nothing more to pay if it is in fair condition. Before that halfway point you can still settle early by asking the lender for a settlement figure and paying it off.
What happens if the car is written off while on finance?
Your insurer pays out the car's market value, but you still owe the finance balance, and early in a deal that balance can be higher than the payout. The shortfall is negative equity, and GAP insurance exists to cover it. Without GAP you can be left paying for a car you no longer have.
Can I sell a car that is still on finance?
Not until the finance is cleared. On HP and PCP the lender legally owns the car until the last payment, so you ask for a settlement figure, pay it off, and only then can you sell. Selling a financed car without settling first is an offence.
Were people mis-sold car finance?
Possibly. The regulator is reviewing "discretionary commission" arrangements, where a dealer could set your interest rate higher to earn more commission, on deals arranged before 28 January 2021. If you took PCP or HP before then, it is worth checking whether you can complain.