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Pros & cons of buying your first car on finance

25/09/2025

Lauren McAfee Insurance Editor and Writer

Last Updated: 25 Sept 2025
Read time: 6 minutes

Written by: Lauren McAfee
Insurance Writer and Editor

Reviewed by: Mark McKeown

Written in line with our Editorial Guidelines

Today, 80-90% of cars in the UK are being purchased through finance agreements – That’s 2 million cars per year*. This method of buying a car is also a great option for new drivers investing in their first car. 

Car finance allows new and often young drivers to spread the cost of purchasing a vehicle into monthly payments, instead of paying it all up front. However, with the 2021 investigation of car finance mis-selling** still fresh in people’s minds, it’s important to fully understand what you are signing up to. 

This guide helps first time vehicle buyers weigh the potential pros & cons of buying your first car on finance. As well as highlighting some red flags to avoid, possible hidden fees and the T&Cs you are signing up to.

Pros and cons at a glance

Pros

Lower upfront cost

Access to newer, more reliable cars

Predictable payments

Build your credit score

Cons

Higher overall cost

Risk of negative equity

Mileage or usage restrictions

Missed payments can damage your credit

Get the full breakdown of potential pros & cons

The basics of how car finance works

When you finance a car, you pay an initial deposit, then fixed monthly payments over an agreed amount of time (usually 2-5 years). These payments include interest, shown as the APR (annual percentage rate). 

The lender still owns the car during this time. This can change once the financing agreement ends, but it will depend on the type of financing you’ve chosen. 

Types of car financing

Hire purchase (HP)

You pay a deposit, then fixed monthly payments with interest until the car is fully paid off. Once the last instalment is made, the car is yours.

Personal contract purchase (PCP)

You pay a deposit and lower monthly payments than HP. At the end, you either pay a lump sum (balloon payment) to own the car, or you can hand it back, or start a new deal.

Leasing or personal contract hire (PCH)

You pay to use the car for a fixed term, but you’ll never own it. Monthly payments are often lower, but you hand the car back at the end.

Personal loan

You take out a loan from a bank or lender, buy the car in full, and own it straight away. You then repay the loan in instalments.

Key considerations before you sign

  1. Can you afford the monthly payments? – Know your budget and if you will be able to manage the payments over the full agreed term.
  2. Have you factored in running costs? – Insurance, servicing, tax, and fuel all add up alongside your finance payments. Include these in your budgeting from the start.
  3. How much deposit should you put down? – A larger deposit typically lowers your monthly costs, so you can find a balance that suits you. Be cautious with “no deposit” offers, as these usually make the deal more expensive overall. 
  4. Is the term length right for you? – Longer terms often mean lower payments, but you’ll pay more interest overall. This is where your APR becomes even more important. 
  5. Do you want to own the car at the end? – Choose HP or a loan if ownership matters. PCP or leasing may suit you better if you prefer flexibility.
  6. What APR are you being offered? – Even a small difference in APR can add hundreds of pounds to the total cost. Do the maths before you commit. 
  7. Are there any hidden fees? – Check the contract for admin charges, early repayment penalties, or end-of-term costs. Hiding unreasonable costs is a red flag.
  8. Are mileage or usage limits included? – With PCP and leasing, going over a specified limit or restriction can come with penalties and added fees.
  9. How will depreciation affect you? – New cars lose value quickly (depreciate). If the vehicle’s value drops faster than you repay, you could end up in negative equity.

Should you get your first car on finance?

Pros of buying a first car on finance

  • Lower upfront cost – You only need a deposit instead of the full price.
  • Manageable monthly payments – The cost is spread over multiple years.
  • Access to newer, safer, more reliable cars – You have more options than if you were paying outright with cash.
  • Fixed, predictable payments – Easier to budget for when compared to unpredictable repair costs on an older car.
  • Option to upgrade regularly – With PCP and leasing, you can switch to a newer car every few years.
  • Can help build your credit score – If you make payments on time, your credit score can improve.
  • Range of deals available – You can find the deposit size, term length, or finance type to fit your needs.
  • Promotional offers – You can benefit from promotions or incentives that reduce costs.

Cons of buying a first car on finance

  • Higher overall cost – Interest and fees mean you pay more than the car’s sticker price.
  • Risk of negative equity – A car’s value can drop over time. If its market value drops faster than you pay it off, you could owe more than the car is worth to sell.
  • You don’t own the car straight away – With HP, ownership comes after the last payment; with PCP/leasing, you may never own the car.
  • Mileage and condition limits – This is common in PCP and leasing, and going over limits will cost extra.
  • Hidden fees or penalties – Admin charges, early exit fees, or end-of-contract costs can add up.
  • Missed payments damage your credit – This can affect your ability to borrow, and be difficult to build up again.
  • Long-term commitment – You’re tied to the deal for years, which reduces flexibility if your circumstances change.

Car finance can make your first car more affordable by spreading the cost while giving you access to newer cars. But it also means higher overall costs and possible limits on how you use the car. The right deal depends on your budget, how long you want to keep the car, and whether ownership matters to you. 

For step-by-step guidance on how to buy a car on finance, FAQs, and to start comparing car finance options, read our complete guide to getting a car on finance.

See the full car finance guide

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Referrences:
*https://www.bbc.co.uk/news/articles/cp3z9l3q5zeo
**https://www.which.co.uk/news/article/car-finance-fca-investigation-what-you-need-to-know-a4eXb5u8VeBy

This article is intended as generic information only and is not intended to apply to anybody’s specific circumstances, demands or needs. The views expressed are not intended to provide any financial service or to give any recommendation or advice. Products and services are only mentioned for illustrative rather than promotional purposes.