Prospective car owners are finding that buying their next vehicle isn’t as straightforward as it once was, thanks to rising interest rates.

The economy has benefitted from over a decade of low rates, making car financing affordable for many. But those rates are now rising considerably, with the indication that the Bank of England isn’t going to stop hiking yet. With that in mind, buying a car with finance isn’t as good value as it used to be. But there are still some good options for prospective owners.

Here are some key ideas to consider when deciding on your next car.


Personal contract purchases or PCPs have become a ubiquitous way to buy a new car in the past few years.

Typically, these kinds of deals mean that you pay lower monthly instalments than hire purchase or via personal loan, making it more affordable for families.

But the upshot of this is you never really own the car. At the end of the deal (typically around three years) you either:

  1. Pay the ‘balloon’ payment – a lump sum – and take full ownership of the car
  2. Return the car to the dealership and get a new PCP deal with a new car
  3. Return the car and walk away.

The trouble with option three is that, typically, the dealer will become a lot more officious about any scratches, dents, or mileage overuse and is likely to charge you fees. It’s in their interest to see you roll into a new finance deal.

As interest rates rise, credit on PCP deals is getting more expensive. This means opting for longer four-year contracts or facing higher monthly repayments. According to data from motoring group What Car, PCP costs have risen around 40% since 2019, reflecting a tight car market and rising interest rates.

Recent stats from automotive IT firm NTT Data UK&I suggest that the majority of people who have PCP contracts currently are now likely to try and refinance their current cars when their deal comes up rather than opt for a new PCP loan with a new car.

Hire purchase

Hire purchase is the more traditional route for anyone looking to buy a car and comes with less caveats. Once you’ve paid off the HP loan, the car is yours and there is nothing further to worry about.

But this means that monthly payments will generally be higher than for PCP. HP loans are also impacted by the rising bank rate, which means these deals are getting more expensive too.


Leasing a car is different from PCP or HP because you never actually have the opportunity to own the vehicle. In effect, you are paying a monthly rental fee for a fixed period, after which you give back the car and walk away.

The benefit of leasing deals is that there is no credit calculation made on the car, so these kinds of deals aren’t directly affected by rising interest rates, according to

That being said, the car market has experienced very unusual circumstances in the past 18 months thanks to supply chain shortages. This means new and used car prices have gone up, which in turn has made leasing more expensive.

Unsecured personal loan

An unsecured personal loan can be a good option when looking to buy a car, especially for those of us who don’t trust dealers to offer the best deal. Getting an unsecured personal loan will require you to shop around for the best deal available and make an application.

Once you’ve been successful and the loan has been given to you, you’re free to use that cash to buy a car. But like the other forms of credit, this market has also seen interest rates go up in the past few months.

There’s another caveat here that your credit rating needs to be in good shape in order to secure a good deal. MoneySavingExpert has a great loan calculator that can help you see which deals you might be eligible for.

It’s also important to remember with these kinds of deals that the APR you see for the loan after a soft check might not be the one you actually get after making an official application. This is because loan companies only need to offer that rate to 51% of their customers in order to be able to advertise it.

If you do go down this route and find the APR you’re offered wasn’t what you expected, you’re under no obligation to accept it – just make sure you tell the provider you’re not interested in moving forward with the application. However, the hard search made on your credit report will appear, so making more applications could harm your credit score.

Buy outright/buy cheaper

Buying outright is perhaps the best way to go if you have the cash funds available, as it eliminates a lot of the variables mentioned above.

That being said, buying a new car is one of the worst ways to use your money in investment terms. According to The AA, new cars lose around 60% of their value (assuming an average mileage of around 10,000 miles a year) in the first three years out of the showroom, meaning the cash you’ve put into that vehicle is essentially gone forever.

There are however variables to this including condition, make and model, fuel type and other factors that will affect the price over time, with some holding up better than others.

With that in mind, lowering your expectations and going for a used car could be the soundest financial decision of all. Older cars that have some mileage on them tend to depreciate in value much more slowly, and in many cases these days you’ll find 4–5-year-old vehicles will have many of the bells and whistles you might expect in a brand new one.

It is also important to remember with cars that the cost isn’t just in the price of the vehicle. Running costs of fuel, insurance, maintenance and repairs all factor in to the ownership of a vehicle, so finding the right one that doesn’t keep you reaching for your wallet is key.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 13th December 2022.