With the new 66 plate launched next week and September one of the key months for new car sales, we look at the respective pros and cons of two key forms of car finance – PCP plans and leasing.

With so many different kinds of car finance to choose from, it can be tricky to know which is best for you. We've compared two of the most popular – personal contract purchase (PCP) plans and contract hire, otherwise known as leasing – to help you decide.

HOW DO THEY WORK?

In essence, both types of finance are very similar. Both require an initial payment, which varies depending on factors such as the length of the contract and the value of the car, and then smaller monthly payments throughout the period of the deal.

The idea is that, though you may not have the capital to buy a car outright, you can split the cost into smaller, more palatable monthly payments.

There is, however, one key difference between these two types of finance – only PCP allows you to own the car.

At the end of the contract, which is normally between two and four years long, a PCP plan will give you the choice of making a 'balloon' payment or handing the car back, whereas a contract hire deal will require you to return the car.

HOW MUCH DO THEY COST?

Put simply, it varies. Every car has a residual value – the amount of money it is worth at the end of the contract – and the combination of initial and monthly payments will have to at least cover the difference between that and the car's value when new.

The cheapest deals, then, will be for cars with a low purchase price and very strong residual values. A car that cost £10,000 when new and is still worth £7,000 at the end of the contract will be cheaper to finance than one that retails at £20,000 when new and is only worth £10,000 at the end of the contract.

The length of the deal will have an effect, too, because a vehicle's depreciation – the rate at which it loses its value – reduces every year. Cars' values generally plummet the moment they leave the dealership, but by the time they are 10 years old, they are only losing a few pounds a year in value.

It's worth bearing in mind, however, that PCP deals will often also factor a certain amount of interest into the price, whereas leasing deals, which are essentially little more than long-term rentals, will not have any interest to pay. There will be a bit of profit margin in there for the dealer or broker, though.

Different dealers will also be able to offer different deals, courtesy of their respective purchasing power. Huge dealer groups will often be likely to give you a big discount thanks to their ability to buy in bulk, which effectively reduces the retail price of the car. Remember, the holy grail is low retail price and high residual value.

WHICH IS RIGHT FOR ME?

It depends on your circumstances and your attitude towards car ownership.

Generally speaking, a PCP plan will have a larger down payment, because leasing deals' initial fees rarely exceed the equivalent of nine months' payments. The trade-off is that PCP deals can have extraordinarily cheap monthly payments, although this advantage is often nullified by the interest charged by the finance company.

If you're thinking of owning the vehicle, though, a PCP plan may be best. It will give you the option to buy the car at the end of the deal, and it is often a good scheme for people who intend to keep their car for a long time.

If, on the other hand, you want to change your vehicle regularly and don't care whether or not you own it, then contract hire will probably be a better bet.