The arrival of the new number plate in September makes it one of the most popular months to buy a car. But if you are keen to get a new set of wheels, it’s worth finding out about the various car finance options before you hit the showrooms.

Personal loan

A personal loan allows you to borrow an agreed amount at a fixed rate of interest over a set period. For example, you might borrow £10,000 at 4% over five years. Interest rates vary, but most lenders charge higher rates for smaller loans. They also take into account your credit score. If you have struggled with debt in the past you could be turned down or offered a higher rate. Lenders are also wary of customers who make multiple loan applications. Kevin Pratt of MoneySuperMarket, the comparison website, says: “It's a good idea to use a soft search facility on a comparison website, or on the lender’s own website. You can then find out if you are likely to be offered a good deal, without leaving a visible trace on your credit file.”

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Pros

Loan rates are low – with some below 3%.

You own the car as soon as you hand the money over to the dealer.

Cons

You will struggle to get a loan if you have a low credit score.

The monthly payments can be higher than some other types of car finance.

Hire purchase

A hire purchase (HP) plan works a bit like a personal loan: you agree the amount you can borrow and pay back the debt at a fixed interest rate over a set term. However, you do not own the car until you have made the final payment. Plus, there is usually an ‘option to purchase’ fee at the end of the agreement.

Unlike an unsecured personal loan, the debt with an HP plan is secured against the car, which means the vehicle can be repossessed if you don’t keep up with the payments. However, it also means that you might be eligible for an HP deal if you have been turned down for a personal loan because the HP plan is less risky for the finance company.

A typical deposit is 10%. Interest rates for HP deals vary so you should shop around. It’s also a good idea to compare the HP rates with personal loans to make sure you get the best deal.

Pros

You might be eligible for an HP plan even if you were turned down for a personal loan.

If you make all the payments, the car is yours.

Cons

The finance company can repossess the car if you don’t keep up with the payments.

The car does not belong to you until you have made all the payments.

Leasing

You should only consider leasing if you never want to own the car, because at the end of the agreement you either extend the lease or hand the car back. In other words, leasing is basically a rental agreement.

You normally have to pay a deposit of between three and six times the monthly payment and then keep up with the monthly payments throughout the term, usually up to four years.

At the start of the contract, you will have to agree a mileage limit – and if you exceed the limit, you will have to pay a penalty charge. You will also have to pay for any damage or repairs to the vehicle. However, if you lease a car, it often includes road tax and breakdown cover.

Pros

Monthly payments are often lower than other types of car finance.

You can change your car every few years.

Cons

You can never own the car.

It could be expensive if you damage the car or exceed the mileage limit.

Personal contract purchase

Personal Contract Purchase (PCP) is similar to a loan but at the end of the deal you can decide whether to buy the car, hand it back or get a new one.

You normally have to put down a deposit of around 10% of the purchase price of the car. But the amount you borrow is based on the difference between the cost of the car and its predicted value at the end of the agreement, typically between two and four years. The monthly payments are therefore lower than for a standard loan because you do not borrow the full price of the car.

Let’s say you opt for a PCP deal over three years for a car with a price tag of £20,000. The finance company asks for a deposit of £2000 and calculates the car will be worth £10,000 when the deal ends, often known as the guaranteed minimum future value. You would therefore borrow £8000 (£20,000 - £10,000 - £2000). Interest rates vary but are usually between 4% and 7%.

The PCP loan is secured against the car, so if you don’t keep up the monthly payments, the car could be repossessed. The advantage of a secured debt is that the credit checks are not always so stringent.

At the end of the three-year term, you could pay the £10,000 to keep the car. You might also have to pay an ‘option to purchase’ fee. If you don’t want to buy the car, you could part exchange it for a different car on a new PCP. Or, you could simply give it back and walk away.

If you choose to hand the car back, you could be liable for fees if the vehicle is damaged beyond reasonable wear and tear. Fees also apply if you exceed the mileage agreed at the start of the contract.

Pros

A PCP is flexible, giving you three options at the end of the deal.

The monthly payments can be lower than for a personal loan or hire purchase plan.

Cons

If you choose to buy the car, you will have to stump up a big final payment.

You could be stung by extra charges if you don’t maintain the car.