Hire purchase (HP)
You pay off the whole car over the term and own it at the end. Example: £406.82 a month, £3,327 interest.
CAR GUIDE
Should I pay cash or finance a car?
Cash is usually cheapest. On an £18,000 car, finance at 9.9% APR over 4 years adds about £3,327 of interest. Finance can make sense when the APR is very low (or 0%) or when paying cash would empty your emergency fund.
Last reviewed: October 2026Figures: worked out with the WorthChex calculators
THE COMPARISON
An £18,000 car, £1,800 deposit, 48 months.
| APR | Monthly payment | Interest | Total cost of car |
|---|---|---|---|
| 0.0% | £337.50 | £0 | £18,000 |
| 6.9% | £385.61 | £2,309 | £20,309 |
| 9.9% | £406.82 | £3,327 | £21,327 |
| 12.9% | £428.16 | £4,352 | £22,352 |
Paying cash, the car costs £18,000. Each step up in APR adds hundreds of pounds.
THE HIDDEN COST OF CASH
What your savings could earn instead.
Paying cash means giving up the interest that money would earn. A fair test: keep the £16,200 in a savings account paying 4%, and pay each finance instalment out of it. Whatever is left after 4 years is what finance gained you (or cost you, if negative):
| Finance APR | Interest paid on finance | Left in savings after 4 years | Better option |
|---|---|---|---|
| 0.0% | £0 | £1,469 | Finance |
| 2.9% | £964 | £426 | Finance |
| 4.0% | £1,333 | £27 | About the same |
| 6.9% | £2,309 | −£1,030 | Cash |
| 9.9% | £3,327 | −£2,132 | Cash |
The rule is simple: finance only wins when its APR is lower than what your savings earn after tax. A genuine 0% deal can beat cash, as long as there are no fees and the car's price was not raised to pay for it. At typical APRs, cash wins. (Savings interest above your Personal Savings Allowance is taxed, which tips the balance further towards cash.)
HP OR PCP?
The two main types of car finance.
PCP
Lower payments because £7,500 is left as a final ‘balloon’. Example: £277.71 a month, then pay £7,500 to keep the car, or hand it back. Interest: £4,630.
Under both, you can hand the car back once you have paid half the total amount payable (‘voluntary termination’). PCP also comes with mileage limits and charges for damage.
DECIDE
A quick checklist.
- Would cash leave you with less than 3 months of essential costs? Keep the buffer and borrow, or buy a cheaper car.
- Is the finance APR lower than your savings rate after tax? Finance may be cheaper.
- Do you have higher-interest debt? Use spare cash to clear that first.
- Will you keep the car long term? HP or cash usually costs less than PCP.
- Ask for the cash price. Dealers sometimes offer bigger discounts on finance deals; compare the total cost, not the monthly payment.
Compare your own deal
Enter the price, deposit, APR and balloon in the car finance calculator.
FREQUENT QUESTIONS
Cash or finance FAQs
Does car finance affect my credit score?
Applying creates a hard search, and the agreement appears on your credit file. Paying on time can help your history; missed payments harm it.
Is a personal loan better than dealer finance?
Sometimes. With a loan you own the car from day one and can compare lenders. Check the APR and total cost of both.
Can I pay off car finance early?
Yes. You have a legal right to settle early, and the lender must give you a settlement figure.
MoneyHelper: car finance explained · FCA: motor finance. Figures are worked examples for planning, not financial advice.