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Confusion over car finance options costing motorists £11,000

Joanna Faith
Written By:
Joanna Faith

Buying a car through finance has grown in popularity in recent years but confusion around picking the best deal is leaving drivers thousands of pounds out of pocket.

New research suggests car buyers could save themselves as much as £11,000 over the course of their lifetime simply by working out the best finance deal.

However, when faced with a list of common car finance options, including Personal Contract Purchase (PCP) deals, hire purchase loans and personal loans, nine out of 10 people surveyed could not pick the cheapest deal.

The study by peer-to-peer platform Zopa also found that over two thirds of UK adults have accepted the first car finance deal offered to them at a dealership, without shopping around.

“Buying a car is a major financial decision, yet it’s so complex it’s nearly impossible for people to work out the best finance option,” said Didier Baclin, chief product officer at Zopa.

In March, the Financial Conduct Authority (FCA) found that some people using finance to buy a car are overcharged on their interest payments by £1,000 or more because of the way lenders pay commissions to motor dealers.

The regulator said the current model, which allows brokers to set customer interest rates, leads to car buyers paying significantly more for their motor finance.

It is assessing the options for intervening in the market, which could include banning certain types of commission model.

Common finance options explained

Hire purchase deals

After paying a deposit – typically around 10% – you pay monthly instalments, which cover the cost of the car plus interest, for the duration of the agreement.

A hire purchase deal, subject to you meeting the lender’s criteria, can enable you to borrow a larger sum of money than is available under a personal loan. The finance company ‘buys’ the car and ‘takes it’ as security meaning that you do not own the car until the loan has been repaid.

If you default on the payments the lender can repossess the car. You are unable to sell the car until the loan has been repaid.

Personal Contract Purchase (PCP)

This is where a finance company buys the car and you pay a deposit and monthly instalments to use it until the contract expires.

At the start of the contract, the finance company gives the car a Guaranteed Final Value (GFV). The GFV will depend on the deposit paid, your monthly instalments and annual mileage.

At the end of the contract, you have the option to make a payment equalling the GFV and take full ownership of the car, hand the car back to settle the remaining finance or if the car is worth more than the GFV – use the difference in value as a deposit towards another car.

Payments under a PCP can be lower than for other types of car finance. A PCP allows you to drive a new car every few years without owning it (if you don’t want to).

PCP contracts impose a mileage limit and penalties apply if you exceed it. Over the term of the PCP you may have only paid off the car’s depreciation so at the end of the contract you will not have any equity in the car.

PCP can work out as an expensive route to car ownership, so it’s important to calculate the total cost of the deposit, GFV and monthly payments.


A personal leasing arrangement allows you to drive a new car for an agreed period and number of miles – without owning it. Leasing arrangements may include other costs such as servicing, tax and insurance.

Without the need to buy or sell a car, changing vehicles is easier under a personal leasing arrangement and monthly payments tend to be lower.

The leasing company bears the cost of the car’s depreciation but no matter how long you lease the car for, you won’t own it. A mileage limit usually applies, with penalties for exceeding it, and you may face extra fees for any damage or wear and tear to the car.