Car Loans UK – Personal Loan vs Hire Purchase vs PCP in 2025

Table of Contents

• Introduction

• What Are the Main Car Finance Options?

  • Personal loans

  • Hire purchase (HP)

  • Personal contract purchase (PCP)

• How Much Do Cars Cost in 2025?

• Comparing Personal Loan vs HP vs PCP

• Interest Rates and Terms in 2025

• Pros and Cons of Each Option

• Eligibility and Approval Criteria

• Alternatives to Traditional Car Loans

• Tips for Choosing the Right Finance Option

• FAQs

• Conclusion

What Is a Car Loan?

A car loan is usually an unsecured personal loan used to buy a vehicle. The bank or lender gives you the funds upfront, you buy the car outright, and then repay the loan in fixed instalments.

• Ownership: You own the car immediately.

• Repayments: Fixed term, 1–7 years.

• APR: Depends on credit score, typically 6%–20%.

Car Finance Alternatives in the UK

1. Hire Purchase (HP)

• Deposit + monthly payments

• You don’t own the car until the final payment

• Usually higher monthly payments than PCP

2. Personal Contract Purchase (PCP)

• Low deposit, low monthly payments

• Option at end: pay balloon payment to own, or return car

• Popular for new cars due to flexibility

3. Leasing (PCH)

• You rent the car for a fixed period

• No option to buy at the end

• Suits drivers who like changing cars often

Costs Compared: Personal Loan vs PCP vs HP

Example – Car Price: £15,000

• Personal Loan: £15,000 at 7.9% APR over 5 years = ~£303/month, total repayable ~£18,180. You own car outright.

• HP: £2,000 deposit + £300/month for 48 months = £16,400 total. Car ownership at end.

• PCP: £2,000 deposit + £200/month for 36 months + £7,000 balloon = £16,200 total if you buy, or cheaper if you return car.

👉 PCP usually gives the lowest monthly cost but highest long-term uncertainty.

Pros and Cons of Personal Loans for Cars

Pros

• Own the car from day one

• Flexibility: buy from dealer, auction, or private seller

• Often cheaper than dealer finance if you qualify for low APR

Cons

• Requires good credit for best rates

• Higher monthly payments than PCP

• Risk: depreciation may leave you in negative equity if you sell early

Eligibility and Lender Criteria

To get a car loan in the UK, lenders check:

• Credit history (clean files get ~6–8% APR, bad credit may see 30%+)

• Income and affordability

• Employment type (full-time vs self-employed)

• Loan amount (typical £2,000–£25,000)

💡 Tip: Use soft search eligibility tools before applying.

Car Loans for Bad Credit

Yes, you can still get approved, but:

• APRs will be higher (20%–49%).

• Lenders may cap loan size at £5,000–£10,000.

• Alternatives: guarantor loans, credit union car loans, or dealer finance with higher rates.

Alternatives to Car Loans

• 0% Dealer Finance Offers: Sometimes available on new cars.

• Credit Cards: Useful for small deposits or if you qualify for 0% purchase deals.

• Salary Sacrifice EV Schemes: Growing for electric vehicles in the UK.

• Leasing: For drivers who want flexibility with no ownership risk.

Practical Tips Before Applying

• Check your credit file for errors.

• Set a realistic budget (car + insurance + tax + MOT + maintenance).

• Compare loan APR vs dealer finance before committing.

• Factor in depreciation — new cars lose ~20–30% value in year one.

• Avoid long terms (e.g., 7 years) unless necessary — you could still be paying when the car’s value has dropped.

FAQs

Q: Is a personal loan better than PCP?
If you want to own the car outright, yes. PCP is better if you want lower monthly costs or plan to swap cars regularly.

Q: What’s the cheapest way to finance a car?
Usually a low-APR personal loan if you qualify. But for new cars, manufacturer 0% finance offers can be unbeatable.

Q: Can I sell a car bought with a personal loan?
Yes — because you own it outright. With PCP or HP, you can’t sell until the agreement ends.

Q: Do car loans require a deposit?
Not usually. Unlike dealer finance, personal loans can cover 100% of the purchase price.

Conclusion: Pick the Right Road for You

When buying a car in the UK, the right finance option depends on your priorities. A personal loan gives ownership and flexibility but requires higher monthly payments. PCP and HP spread costs differently, often with lower upfront commitments but less long-term freedom.

Always compare APRs, total repayable amounts, and your personal circumstances before deciding. Whether you’re upgrading to a family SUV, buying your first car, or switching to electric, smart financing ensures your car doesn’t become a financial burden.