Cars & motoring
A car is the second-biggest purchase most households make, and the way you pay for it usually costs more than the car itself. Understanding finance deals, insurance pricing and the real running costs — petrol, electric or hybrid — is the difference between a car that fits your life and one that quietly eats your budget.
- Published:
- Last updated:
- Reviewed by:
- Money Guide editorial team
How car finance actually works
Around nine in ten new cars in the UK are bought on finance. The headline monthly payment is rarely the full picture — the structure of the deal decides what you own at the end and how much the car has really cost you.
- Personal Contract Purchase (PCP)
You pay a deposit, then monthly payments for 2–4 years, then a large optional 'balloon' payment (the Guaranteed Future Value) if you want to keep the car. Most people hand the car back or roll the equity into a new deal. Mileage limits apply — going over usually costs 6–15p per mile.
- Hire Purchase (HP)
Deposit plus monthly payments that fully pay off the car over 2–5 years. No balloon, no mileage limit. Higher monthlies than PCP for the same car, but you own it outright at the end.
- Personal Contract Hire (leasing)
You're renting, not buying. Fixed monthly payments for 2–4 years then you hand the car back — there's no option to own it. Often the cheapest way to drive a brand-new car, especially for EVs, but you must stay within agreed mileage and condition standards.
- 0% dealer finance
Genuinely free credit exists, but the car price is usually inflated to absorb the cost. Always compare the cash price you could negotiate against the total finance cost — including the deposit.
Voluntary Termination — the right most people don't know about
Under the Consumer Credit Act 1974, on regulated PCP and HP agreements you have the right to hand the car back once you've paid 50% of the total amount payable (including the balloon, on PCP). You walk away with no further liability, provided the car is in reasonable condition.
This is a statutory right — the dealer cannot refuse it. Check your agreement for the '50% figure' and how much you've paid in total to date.
Electric vs petrol vs hybrid: the real running costs
The sticker price gap between EVs and petrol cars has narrowed but isn't closed. Where EVs usually win is the running costs over 3–5 years of ownership.
- Fuel/charging
Home charging on an off-peak tariff (around 7p/kWh) costs roughly 2p per mile. Petrol at typical UK prices costs around 14–18p per mile. Public rapid charging can be 70–85p/kWh, which is often more expensive than petrol.
- Vehicle Excise Duty (road tax)
From April 2025, EVs pay VED at standard rates — the exemption ended. New EVs over £40,000 also pay the 'expensive car supplement' (£410/year for years 2–6).
- Servicing
EVs have far fewer moving parts: no oil changes, fewer brake replacements (regenerative braking does most of the work), no exhaust system. Annual servicing typically costs 30–40% less than a comparable petrol car.
- Insurance
EVs are currently 20–30% more expensive to insure on average — higher repair costs and a smaller pool of specialist repairers. The gap is closing as the market matures.
Buying used safely
An HPI (or equivalent) check costs around £20 and tells you whether the car is on outstanding finance, has been written off, stolen, or has a mileage discrepancy. Never buy a used car without one — buying a car still on finance means the finance company can repossess it from you.
Use the free gov.uk MOT history service to see every advisory and fail going back years. A car with repeated advisories on the same item (corroded brake pipes, worn suspension) tells you what's coming.
Section 75 and chargeback for car purchases
If you pay any part of a car costing between £100 and £30,000 on a credit card — even just the deposit — Section 75 of the Consumer Credit Act makes the card issuer jointly liable with the seller for the whole purchase if something goes wrong. Many people pay £100 of a £15,000 deposit on a credit card specifically to get this protection.
ULEZ, Clean Air Zones and Congestion Charge
London's Ultra Low Emission Zone (ULEZ) charges £12.50/day for non-compliant vehicles 24/7 across all London boroughs. Compliant: petrol Euro 4 (most post-2005), diesel Euro 6 (most post-September 2015). Check any registration plate free on Transport for London's site.
Clean Air Zones operate in Birmingham, Bath, Bradford, Bristol, Newcastle/Gateshead, Portsmouth, Sheffield, Tyneside and elsewhere — each with different daily charges and exemption rules. The London Congestion Charge (£15/day) applies separately to central London on top of ULEZ.
Salary-sacrifice EVs through your employer
Pure electric cars carry a 3% Benefit-in-Kind rate (2025/26), rising 1%/year to 7% by 2028/29 — meaning an employer salary-sacrifice EV lease is currently the most tax-efficient way most employees can drive a new car. You give up gross salary in return for the lease; the employer benefits from the corporation-tax relief and reduced employer NI.
Net cost is typically 30–50% less than financing the same car personally. Available through schemes like Octopus Electric Vehicles, The EV Cafe, Loveelectric and many corporate benefits portals — ask your employer if they offer one.
Buying privately vs trade vs auction
Private sale: typically cheapest but no consumer rights beyond 'as described'. Take a knowledgeable friend or pay £200–£300 for an independent inspection (e.g. RAC or AA).
Franchised dealer (main dealer of that brand): most expensive but strongest after-sales support and approved-used schemes with warranties of 1–2 years.
Independent dealer or supermarket: middle ground — Consumer Rights Act 2015 still applies (the car must be of satisfactory quality, fit for purpose, as described), and you have 30 days to reject for a full refund if something is wrong.
Online retailer (Cazoo, Cinch, Carwow): 7-day cooling off, home delivery, but you give up the chance to inspect first.
Common car finance scams and traps
Watch for: 'logbook loans' (high-cost secured lending using your car as collateral — avoid except as a last resort); dealers adding excessive admin/protection fees ('GAP insurance', paint protection, fabric coatings — almost always overpriced compared to standalone alternatives); 'discounted' deposit contributions only available if you take the dealer's preferred finance product (always quote a standalone personal loan as a comparison).
Following the 2024 Court of Appeal ruling on undisclosed commission in motor finance, many borrowers may be due refunds. Wait for FCA guidance before paying any claims management company — you can always complain free, directly to the lender then the Financial Ombudsman.
Go deeper on cars
Car finance mis-selling: how to claim compensation
Hidden commissions on car finance have become one of the biggest UK consumer-finance stories. This guide explains discretionary commission arrangements, who may be affected, and how to claim through the official, free route rather than paying a claims management company.
Read the explainer →Car finance: PCP vs HP vs leasing
The three main ways to finance a new or used car in the UK are Personal Contract Purchase (PCP), Hire Purchase (HP) and Personal Contract Hire (leasing). They look similar from the showroom forecourt, but the ownership rights, monthly cost and what happens at the end are very different.
Read the explainer →Vehicle Excise Duty (VED): the 2025/26 rates
Vehicle Excise Duty — commonly called car tax or road tax — changed significantly on 1 April 2025. Electric vehicles lost their exemption, the £40,000 expensive-car supplement now applies to EVs as well, and most petrol and diesel rates went up with inflation.
Read the explainer →Car insurance groups and how to cut premiums
Every car sold in the UK is placed in one of 50 ABI insurance groups based on repair costs, performance, safety features and security. The group number is one of the biggest single factors in your premium — alongside your age, address, mileage and claims history.
Read the explainer →
Common questions
- Is PCP a rip-off?
- Not inherently — it's a tool. PCP works well if you want a new car every 3–4 years, drive predictable mileage, and value low monthly payments. It works badly if you regularly exceed your mileage, want to own the car, or are tempted to roll negative equity into a new deal indefinitely. Always compare the total amount payable across HP, PCP and a personal loan for the same car.
- Can I get out of a car finance deal early?
- Yes. The two main routes are settling early (asking for a settlement figure and paying it off, often with a rebate of interest) or Voluntary Termination once you've paid 50% of the total amount payable. Check your agreement — both options are statutory rights on regulated agreements.
- Is an EV really cheaper to own?
- Usually yes, over 4+ years of ownership — provided you can charge at home on an off-peak tariff. The break-even calculation tips against EVs if you rely heavily on public rapid charging or change cars every two years (where depreciation matters more than running costs).
- Do I have to tell my insurer about modifications?
- Yes — including non-performance changes like alloy wheels, tinted windows or a tow bar. Failure to disclose modifications can void cover entirely, leaving you uninsured at the point of a claim. A small premium increase is far cheaper than an unpaid claim.
- Are car finance commission refunds real?
- Following the October 2024 Court of Appeal ruling in Johnson v FirstRand Bank, undisclosed commission on motor finance arrangements may have been unfair. The FCA is consulting on a redress scheme and has paused some firms' complaint timelines. You can complain free, direct to your lender — there's no need to use a claims management company that takes 25–35% of any refund.
- What's the cheapest way to insure a new driver?
- Telematics ('black box') policies are typically 30–50% cheaper for under-25s — premiums adjust based on real driving data. Adding an older, experienced driver with a clean history as a named driver also reduces premiums, provided they genuinely use the car. Multi-car policies under one household are worth a quote. Never 'front' (declare an experienced driver as the main driver when they aren't) — it's insurance fraud and invalidates the policy.
- Should I lease, PCP or buy outright?
- Buying outright is usually cheapest over the lifetime of the car, especially if you keep cars 5+ years. PCP works for people who want a new car every 3 years on predictable mileage and accept handing it back. Personal leasing is usually cheapest for short-term new-car driving, particularly for EVs through salary sacrifice. Run the total amount payable side by side — the monthly figure alone misleads.
- What is VED (road tax) for an EV now?
- From 1 April 2025, EVs registered after that date pay £10 in the first year and the standard £195/year thereafter. EVs registered between April 2017 and March 2025 pay the standard £195. EVs over £40,000 list price also pay the £410/year 'expensive car supplement' in years 2–6. Hybrids and ICE cars use the regular CO2-based system.