New car finance: loans and leases explained

New car finance: loans and leases explained

This blog is general information only. It isn’t advice, and isn’t an insight into the views of TSB or any of our Partners.

Whether you’re looking for a top of the range sportscar or a reliable city run-around, buying a new car is exciting. Yet choosing the best way to pay for it can be confusing. Here, we give you the facts on some of the most popular ways to finance a new car.

New car finance: loans and leases explained

Is leasing a vehicle right for you?

Leasing a car is a way of renting a vehicle for a fixed period on a finance plan, which is usually arranged by a car dealership or specialist car leasing company. There are two main options: personal contract hire (PCH) and personal contract purchase (PCP). Both see you paying fixed monthly instalments over an agreed term – usually between two and five years – following an initial, larger payment at the start of the lease. With PCP, you also have the option to buy the car at the end of the term. 

What is PCH?

PCH lets you lease a car over a pre-agreed term for a fixed monthly fee. It’s a great option for those who like to change their cars regularly, don’t want to worry about depreciation, and can offer you a cost-effective way of driving a car you couldn’t normally afford to buy. At the end of the term you simply hand it back to the leaser, leaving you free to choose another new vehicle on a new finance plan. 

What is PCP? 

If you think you might like to own your car at the end of the lease, then PCP may be a better option. Your monthly repayments cover the car’s depreciation costs, plus interest. And at the end of the lease you can buy the car outright by making a pre-agreed ‘balloon payment’ – the value the leaser has predicted the car will be worth. If you decide you don’t want to own the vehicle after all, you simply hand back the keys and walk away.  

Considerations when leasing a vehicle

Leasing a vehicle gives you the opportunity of driving a new car for a fixed monthly fee for a set period. Depending on the terms of your finance deal, the payments may also include Vehicle Excise Duty and some servicing and maintenance costs, making it even easier to plan your budget. 

However, you may have to stick within a pre-agreed mileage limit or you’ll be subject to excess charges which can be costly, you can’t make modifications to the vehicle, and you’ll be charged for any damage. In addition, some leasers might require you to have fully comprehensive car insurance. 

If you need to get out of the lease early – perhaps your situation has changed and you can’t afford the repayments – you may be penalised: this will depend on the terms of your lease and any arrangements with the leaser. 

Is a loan the right way to finance your new car? 

Personal loans are a popular way to finance second-hand cars. But you may also want to consider them for new cars, depending on the size of your deposit and how much your new car costs.

Once you know the cost of the vehicle you want to buy, shop around to find the best unsecured loan for your needs. Make sure you look at the interest rate offered, whether it’s fixed or variable, the length of the contract, whether there are penalties for overpaying, and how quickly you can get the money. Some loans providers offer something called a ‘soft search’, which means you’ll know the actual interest rate you would be charged before completing a full application without it impacting your credit rating. It’s important to understand how much you’re borrowing and how much it’ll cost you to repay in total, and work this into your monthly budget. 

If you already have an account with the bank you’re getting a loan from, you may be able to receive your money the same day you apply. Having available funds can help during the sale process by giving you leverage to haggle on the price. 

Considerations when taking out a loan

Unlike PCH or PCP, taking out a loan means you won’t be subject to any restrictions on mileage. Plus, you can add modifications – such as a tow bar or roof rack – if you need. 

Being the owner of the car means you’ll be liable for all Vehicle Excise Duty, servicing and maintenance costs. If you need to pay off the loan early there may be financial penalties. 

Although a new car will depreciate as soon as you drive off the forecourt, once the loan is paid off you will only be liable for running costs, rather than having to keep up payments for another new car, so you might find it has less impact on your budget long-term. 

If you’re thinking about buying a new car, do your research. Considerations include your budget, how much you drive and whether or not you want to own the vehicle in the long term. All finance options will require you to have a credit check, which will often determine the value of your lease or loan. Likewise, falling behind on your monthly repayments could affect your credit score. Finally, don’t forget to shop around for the car itself: prices vary considerably depending on the dealership and you want to make sure you get the best deal possible.

Everything we publish on Straightforward Money is provided as general information only. It isn’t advice, and isn’t an insight into the views of TSB or any of our Partners.
Please think about getting independent financial advice if you want help with your personal situation.
We try really hard to make sure everything’s accurate when we publish it.  But the information can sometimes become out of date.  
For example we might link out to sites that we like or think might be helpful, but that link may have been replaced by the other site.  
Links to external content are provided for information purposes only; they’re not a TSB recommendation of any brand or service.

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