Buying a car in 2025 is a completely different experience from what it was even a decade ago. With higher adoption rates of EVs across the UK and beyond, coupled with used cars retaining their value really well, more and more people are relying on finance to get behind the wheel.
The only tricky part is knowing which type of finance makes the most sense. With so many options across the market, how do you even begin to decide?
Whether you’re looking at a brand-new hatchback or a dependable used SUV, it’s important to understand how HP, PCP, PCH and personal loans differ, with each having its advantages and drawbacks depending on your goals, usage, and budget.
In this handy guide, compiled by our finance expert, we’ll walk you through the main types of car finance in 2025 in clear and simple terms, helping you figure out what could work best for your personal situation and long-term goals.
Without further ado, grab a drink, take five,- and let’s dive straight in.
Understanding Hire Purchase (HP)
First up, Hire Purchase (HP) is a great option if you’re looking for a straightforward path to car ownership. It’s one of the more traditional finance methods, but it’s still really popular in 2025. In simple terms you usually put down a deposit of around 10%, then pay off the rest in monthly chunks. Once the final payment and a small fee are settled, the car is all yours.
People like HP in large part because it’s really simple. There are no mileage caps, no surprise charges at the end, and you know exactly what you’re paying each month (which is great for budgeting). It’s also ideal if you plan to hang onto the car for a good length of time.
That said, it’s worth noting that your monthly payments will be higher than they would be with a PCP deal (we’ll get on to that below), because you’re covering the whole cost of the car, not just its depreciation. Technically, the car also belongs to the finance company until your last payment goes through.
Despite newer finance options on the market, lots of people’s experience with HP is positive- although it does depend on your circumstances and the trade-offs you’re willing to make. We also strongly suggest shopping around dealers and finance companies to get the best deal.
Pros
Straightforward and predictable
You get full ownership at the end
No mileage limits or end-of-contract fees
Great if you plan to keep the car long-term
Cons
Monthly payments can be on the higher side
The car isn’t legally yours until the final payment
Not ideal if you like to switch cars often
Sometimes requires an upfront deposit
Personal Contract Purchase (PCP): Flexibility at a price?
If you’re after lower monthly payments and a bit more flexibility, the next option worth considering is Personal Contract Purchase, more commonly abbreviated to PCP.
PCP has become the go-to choice for many UK car buyers over the past few years, and it’s still widely used in 2025. It works a bit differently from HP. Instead of paying off the full value of the car, your monthly payments only cover the expected depreciation during your agreement term, plus interest. This means your monthly outgoings are usually lower than they would be with HP.
At the end of the agreement, you’ve also got three choices that are worth really thinking about. You can return the car with nothing further to pay (as long as it’s in good condition and within the agreed mileage), pay a large final ‘balloon payment’ (explained by Santander here) to keep it, or trade it in and use any equity as a deposit on your next vehicle.
The biggest appeal with PCP is with flexibility; it’s easier to drive a newer or more expensive car without committing to ownership straight away. If the car you buy holds its value well, you might also have equity left over at the end which is a huge bonus.
However, there are limits and potential drawbacks to consider. You’ll need to stick to an agreed mileage in most cases, or face excess charges, and the car has to be in good condition when returned. If you decide to keep it, you’ll also need to plan ahead for that balloon payment, which can be a significant sum.
Pros
Lower monthly payments than HP
Option to return, keep, or upgrade at the end
Drive a newer or higher-spec car for less
Possible equity to roll into your next deal
Cons
Mileage limits and wear-and-tear charges apply
Large final payment if you want to keep the car
You don’t own the car during the agreement
Equity depends on used car values holding up
Following on from PCP, another increasingly popular option in 2025 is Personal Contract Hire, (PCH)- especially for those who aren’t really interested in owning a car outright.
PCH works more like a long-term rental essentially. You pay an initial fee, followed by fixed monthly payments for a set period- usually between two and four years. When the contract ends, you simply hand the car back. There’s no balloon payment, no selling involved, and no worries about depreciation.
The appeal with PCH is very much in the simplicity. Road tax is often included, and you’re free to switch to a brand-new vehicle every few years. For those who prioritise low hassle and like driving the latest models, PCH can be a brilliant fit.
On the flip side, there are a few things to definitely watch out for and factor into your planning. With PCH you’ll more than likely face mileage limits, and exceeding them can lead to costly charges. The vehicle also needs to be returned in good condition, or you could face end-of-lease penalties. Unlike HP or PCP, there’s no option to buy either: all your payments go towards usage, not ownership.
Pros
No need to worry about depreciation or resale
Fixed monthly costs make budgeting simple
Often includes road tax
Access to new cars every few years
Cons
You never own the car
Mileage caps and condition rules apply
No equity or asset at the end
Early termination fees can be high
Would a Personal Loan be a better bet?
Rounding off the main finance types, personal loans offer a simple and direct route to car ownership, and they still make a lot of sense for many UK drivers as we head through 2025 and beyond.
With this method, you borrow a fixed amount from your bank or lender and use it to buy the car outright. You then repay the loan in monthly instalments over a set term (usually two to five years).
The biggest selling point is that the car is yours from the start. That means no mileage caps, no end-of-agreement admin, and full freedom to modify, sell, or trade in the car as you please. You also won’t have to worry about returning the car in a certain condition or paying a balloon payment (which as we’ve mentioned can be costly).
Interest rates can also be highly competitive, especially if you’ve got a good credit rating (check yours beforehand on Experian, Equifax or TransUnion). That can make this a surprisingly cost-effective option, especially for used cars where depreciation is less of a concern.
On the downside, you’ll take the brunt of that depreciation if you’re buying new. You’ll also need to budget for a higher monthly repayment, since you’re covering the full cost of the car, not just a portion like with PCP or PCH.
Pros
Full ownership from the outset
No mileage or wear-and-tear penalties
Sell or upgrade the car at any time
Competitive rates for those with strong credit
Cons
Higher monthly payments than other options
Depreciation risk is entirely yours
No built-in upgrade path
Other Car Finance Options to explore
While the four main types of car finance we’ve touched on above tend to dominate the market, they won’t be the right fit for everyone. Depending on your situation, there are other finance options worth exploring that might offer more flexibility or work better with your financial goals and current credit score.
No Deposit Car Finance
If you’re not in a position to pay a large amount upfront, there are still other ways to get you behind the wheel. While most finance agreements ask for an initial deposit, this isn’t always a requirement, especially in today’s competitive car finance market.
No deposit car finance from ChooseMyCar and other reputable providers lets you spread the entire cost of a vehicle over monthly installments, with no upfront payment needed. This can make car finance more accessible, especially if you’re really keen to get on the road quickly without dipping into savings.
Of course, if you do head down this route there are a couple of trade-offs. Monthly payments can be higher, and you could face higher interest rates since you’re financing the full cost of the vehicle. You may also find you start in negative equity, meaning the car is worth less than what you owe for a time.
If you do opt for a no deposit plan, make sure to choose a provider with a strong track record. Checking platforms like Trustpilot can be really helpful to weed out the companies that buyers have had a poor experience with.
A Case for Credit Unions?
Another decent alternative worth considering is a credit union loan, particularly if you prefer borrowing from a community-focused lender rather than a high street bank or car dealership.
Credit unions are not-for-profit’s that often offer competitive interest rates and may be more flexible with who they lend to. Membership usually depends on where you live, work or have some community connection, but once you’re in, the service is often more personalised than what you’d get from a traditional lender.
Since credit unions aren’t driven by shareholder profits, their rates can also lower- potentially saving you money over the length of the loan. They also tend to take a more human approach to lending, sometimes looking beyond credit scores to assess your full financial picture.
Our Tips for Choosing the Right Car Finance in 2025
Now that you’ve explored the main types of car finance (along with some alternative routes) it’s worth stepping back and thinking about what matters most when making your final decision. Before you rush to sign off and that stylish saloon or practical estate, follow these practical steps:
Know your budget Factor in insurance, fuel, tax, servicing and any unexpected repairs: not just your monthly payment.
Decide if you want to own the carThis can be a key factor in choosing between HP, PCP, PCH or a personal loan.
Watch the interest rates Small differences in APR can add up significantly over the course of an agreement.
Consider your mileage If you drive long distances, be cautious with PCP and PCH deals, which usually come with mileage limits.
Check for early repayment penalties If you think your circumstances might change, make sure your finance plan allows some flexibility.
Use online calculators Car finance tools from sites like CompareTheMarket can help you compare total costs easily.
Review your credit score first A higher score can sometimes mean lower interest rates and more approval options.
Read the small print Always review the terms carefully: especially balloon payments, condition charges and what happens at the end of the agreement.