Most new cars in the UK are now driven away on some kind of finance, and the monthly payment has become the number people focus on. But a low monthly figure does not always mean a lower overall cost. Whether owning your car outright works out cheaper depends on how long you keep it, how far you drive and what you would otherwise do with the money.
Here we look at the main ways of getting a car, how to compare them fairly and why owning one with no finance outstanding can give you more options later.
The main ways to pay for a car
- Buying outright. You pay the full price with savings or the proceeds of selling your old car. The car is yours from day one.
- Hire purchase (HP). You pay a deposit and then fixed monthly instalments. The finance company owns the car until the last payment, often including a small option-to-purchase fee.
- Personal contract purchase (PCP). Monthly payments are lower than HP because a large chunk of the price is deferred to an optional final payment, sometimes called a balloon. At the end you can pay it and keep the car, hand the car back or use any equity towards another one.
- Leasing (personal contract hire). You rent the car for a fixed period and give it back at the end. You never own it.
How to compare the real cost
The fair way to compare is to add up everything you will pay over the same period, then subtract what you will own at the end.
For finance, that means the deposit, every monthly payment, any fees and, for PCP, the final payment if you plan to keep the car. For leasing, add any charges for extra miles or wear and tear. For buying outright, include the interest you could have earned by leaving the money in savings.
Then ask what you are left with. After HP or a cash purchase, you have a car with a resale value. After a lease, you have nothing to sell. After PCP, you have a car only if you pay the balloon. That is why the option with the lowest monthly payment can turn out to be the most expensive over time.
What depreciation means for your wallet
Depreciation is the value a car loses as it ages, and it is usually the biggest single cost of running one. New cars tend to lose value fastest in their first few years, then the drop slows down.
When you lease or use PCP, the monthly payments are largely covering that early depreciation. When you buy a used car outright and keep it for many years, someone else has already taken the steepest part of the fall. For some drivers, a reliable car bought outright and kept for a long time can work out cheaper overall, even after allowing for repairs, though it depends on the car and how it is used.
Limits and flexibility
PCP and lease agreements usually come with an annual mileage allowance and rules on condition. Go over the miles or return the car with damage and you can face extra charges. When you own the car, you can drive as far as you like and decide for yourself when a scuff needs fixing.
If you are on HP or PCP and your circumstances change, you have a legal right to end the agreement and hand the car back at any time, as long as you have paid, or pay, half of the total amount payable. MoneyHelper has free guides on car finance if you want to understand your options in more detail.
Owning outright gives you more options
A car you own with no outstanding finance is an asset. You can sell it whenever you like, and if you ever need to borrow, it can be used as security. That is how a logbook loan works.
At Logbook Money, we lend from £1,000 to £50,000 against a car, van or motorbike that you own with no finance left to pay. Our decision is based on the vehicle's value and your affordability, not just your credit score. You keep driving as normal, and we never take your V5C logbook or spare key. You can check which vehicles we accept and whether you meet our eligibility criteria.
Borrowing against your car is not a decision to take lightly. A logbook loan is a costly form of credit, and the loan is secured with a Bill of Sale, so the car is at risk if you fall behind. Compare it with other ways to borrow first, using our guide to comparing the cost of borrowing.
This article is general information, not financial advice. For free, impartial help with your own situation, visit MoneyHelper.
Your car may be repossessed if you do not keep up repayments on a loan secured against it.
