Car finance


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How does car financing work?

If you’re in the market for a new car but lack the funds to pay for it outright, you have other options to consider. Car financing can help by letting you pay in monthly instalments.

There are a few different types to think about, but we’re here to explain it all, so you can find the option that suits your circumstances and finances - whether that’s a car loan, personal contract purchase (PCP) or hire purchase (HP).

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Types of car finance

Find out the pros and cons of different types of car finance, so you can make the right decision easily.

Car loans

A car loan is a personal loan (also known as an unsecured loan), which is used to purchase a vehicle.

You don’t have to go through the car dealership and can apply for a car loan from a bank, building society or peer-to-peer lender.

You choose the amount you want to borrow, as well as how long you need to pay it off (loan term) and you’ll make monthly repayments until you’ve repaid it in full, plus interest.

Pros of a car loan

Ownership of the car - You’ll own the vehicle as soon as the money is paid, so you won’t be restricted by terms and conditions in the same way you would with PCP or HP

Choose exactly what you need - You can decide how much you need to borrow and for how long, to make your monthly repayments affordable. Just remember that the longer the loan term, the more you’ll end up paying back overall

Not secured – A personal loan is unsecured, which means your car isn’t at risk of being repossessed. You still need to keep up with your payments though

Possible low interest rates - If you have an excellent credit history, you may have access to the best interest rates, making it a relatively cheap way to borrow

Cons of a car loan

Relies on a good credit history – The interest rate you’re given will depend in part on your credit history. Those with a lower credit score could struggle to get a competitive interest rate or may find their application rejected altogether. Use our smart search tool to find the loans you’re more likely to be accepted for, without affecting your credit file

Missed repayments – Failing to make your monthly repayments can negatively affect your credit score, potentially making it harder to access credit in the future

No option to change car – You won’t be able to upgrade your car to a newer model every few years as you can with other car finance options

Personal Contract Purchase (PCP)

With this type of car finance, you’ll be required to pay a deposit on the car, usually 10% or more. In fact, putting down a larger deposit can give you access to lower interest rates.

You’ll then make monthly payments until you’ve repaid the amount owed, plus interest. Loan terms are usually between one and five years. When the final payment has been made, you can either hand back the keys, make a large ‘balloon’ payment to keep the car, or trade it in for a new vehicle and start a new PCP.

Pros of PCP

Access to higher value cars – You might be able to afford a car that normally would be out of reach financially

Lower monthly payments – This can make it easier on your bank balance and help ease the financial burden of buying a car

Flexibility at end of the deal – You can choose to purchase the car outright, trade it in for a new car, or hand back the keys

Deals on the deposit – You may find a car dealer who is willing to cover the deposit, so you’d only be responsible for the monthly repayments

Cons of PCP

Possibility of repossession – This type of finance is secured against the vehicle, so if you fail to repay, it can be repossessed

No ownership of car – Unless you decide to make a large ‘balloon’ payment at the end of the deal, you won’t own the vehicle

Watch out for fees – If you damage your car, you could be hit with charges

Mileage limits – It might not be the right option for those who travel a lot for work as it’s likely you’ll need to keep below a certain mileage, and you could even be charged if you go over

Mainly for cars over £10,000 – If you’re looking for a lower value vehicle, think about using a different type of car finance

Hire purchase (HP)

A HP agreement is similar to a car loan in that you make monthly repayments. The difference is that you own the car outright once the full amount, plus interest, has been repaid. During the term of the agreement, you’re technically just hiring the car.

However, the loan is secured against the vehicle, which means it can be repossessed if you default on your payments. Plus, you’ll be required to pay a deposit at the start of the agreement, usually 10%.


Available to those with poor credit – As it’s secured against the vehicle, you’re more likely to be accepted if you have a bad credit history, but it’s important to still make sure the payments are affordable to avoid repossession

Borrow a larger amount – It may be possible to borrow more than you would be able to with a personal loan

Own the car outright – At the end of the agreement, the car will be yours. So, whether you want to sell or keep it, is up to you

No mileage restrictions – Unlike PCP, it’s unlikely you’ll face mileage limits with a HP agreement


Your car might be repossessed – If you fail to keep up with your repayments, your vehicle may be taken from you

Higher monthly payments – Your repayments could be more expensive than with other car finance options

Requesting permission – You won’t be able to modify the car or sell it during the agreement without consent

Watch out for the terms – If you opt for a longer term or a smaller deposit, your monthly repayments will be higher

What’s the best car finance option for me?

The right option for you will be the one that provides you with an affordable way to purchase the car you want.

It’s important to take into consideration any deposit you may be required to pay and the monthly repayments.

If you’re thinking about a personal loan, you’ll need to have a great credit score to access the better interest rates, or it can get expensive.

Also think about whether it’s important you own the car outright or if you’re happy for the loan to be secured against the vehicle.

And lastly, do you want to keep the car at the end of the loan term, or do you think you may want to change vehicles?

This will help you choose the best car finance option to suit you.

Here’s a quick comparison to help you decide.

Personal loan PCP PCH Hire purchase
Deposit and/or part exchange needed No Usually Usually Usually
Monthly payments Yes Yes Yes Yes
Balloon payment at the end No Yes Not applicable No
Excess mileage charges No Yes Yes No
Secured (against the car) No Yes Yes Yes
You own the car from the start Yes No You never own the car No
You own the car at the end Yes No - unless you pay the balloon payment No Yes

How to compare car finance options

All you need to do is tell us some details about yourself and the car you want to buy, including how much it costs, how much you can afford to put towards the deposit, and how long you want to take the loan out for.

If you know it, you can enter the car’s registration and let us know how many miles it has done, and how many miles you’re expecting to drive each year.

We can then let you know the car finance options available to you and how likely you are to be accepted for them using our smart search tool.

Compare the costs, as well as the terms and conditions of the different types of loans to find the right choice for you.

What do I need to apply?

You’ll need a proof of identity to hand when applying for car finance, as well as proof of income, and your address history for the last three years.

Remember you’ll be subject to a hard credit check when you apply for a loan or car finance, so you may want to have a look at the state of your credit file before deciding which option is the right choice for you.

Getting car finance with bad credit

If you have a poor credit history, you may find your options are more limited. It can make it harder to be accepted for personal loans, especially the best interest rates.

You may want to consider a HP agreement which is secured against the vehicle, as the lender may be more likely to accept those with a lower credit score. Of course, if you start missing your repayments, you could have your car repossessed.

If you can, it may be worth trying to improve your credit score before applying for car finance to open up more options.

Find out more about bad credit loans.

Frequently asked questions

The eligibility criteria for car finance loans will differ between lenders and the type of loan you choose.

It’s always a good idea to make sure you fulfil the criteria before applying to avoid rejected applications.

You’ll definitely need to be aged 18 or over and a UK resident though.

You may be able to, but it will depend on the lender. You could face an early repayment charge which can be expensive, so check the terms and conditions carefully.

A soft search is when a check is performed on your credit file which doesn’t leave a mark, unlike a hard credit search.

We conduct one when you use our smart search tool. This enables us to show you the loans you’re more likely to be accepted for without affecting your credit score.

Be aware that applying for multiple loans close together can negatively impact your credit score.

If you’re struggling to make your repayments, always contact your lender, preferably before you start to miss any. They can work with you to come up with a plan to ease the financial pressure.

If you do start to miss your repayments, it will negatively affect your credit score, making it harder to be accepted for credit in the future. You could also have your car repossessed if you’ve chosen a PCP or HP agreement. You could even find yourself facing legal action or debt collectors.

Contact StepChange or National Debtline to speak to an adviser for free about how to manage your debt.

If you use a personal loan to buy a car outright, you can sell it whenever you want because you own it.

But, if you’re still paying off your car finance, it’s unlikely you’ll be able to sell it as you don’t technically own it. You may be able to sell it once you’ve repaid the loan, but you’ll need to check the terms and conditions carefully.

APR stands for annual percentage rate and it shows you how much the loan will cost over a year as a percentage. It includes the interest rate, as well as any fees or charges.

The higher the percentage rate, the more expensive it will be.

Use the APR to easily compare the loans available but remember that the advertised APR may not be what you actually receive. In fact, lenders are only required to offer it to 51% of successful applicants, so your loan may actually be more expensive.

Yes, it’s possible to buy a used car on finance and it’s actually quite common.

However, it’s easier to find financing options when you purchase through a dealership, rather than a private seller. If you’ve chosen the latter, you may have to think about a personal loan rather than a PCP or HP.

This will be determined by your personal and financial circumstances. For instance, you’ll find it harder to be accepted for a loan without a regular income.

Also, your credit history will be checked to analyse your ability to pay back debt. If you have a record of missing repayments or taking out a large amount of debt, it will affect what you’ll be able to apply for.

It will also depend on the finance option you choose.

It can be, depending on the option you choose. For instance, a longer term will result in paying more overall and if it has a higher interest rate, it can get pricey.

That’s why it’s always best to compare all the options available - that means not only the type of car finance, but also the lenders and loans, to find the cheapest option for you.

Yes, a good credit score always helps if you’re applying to borrow money because it shows lenders you’re able to repay debt and abide by the terms and conditions of a credit product.

However, car finance options that are secured against the vehicle, like HP, may be more flexible when it comes to accepting people with a lower credit score.

If you’ve taken out finance to buy a car, you might consider buying Guaranteed Asset Protection (GAP) insurance.

In the event of your car being declared a total loss, written off or stolen, you may still have outstanding payments to make.

GAP insurance for financed cars pays off the remaining loan value so you aren’t left out of pocket by paying for a car you no longer have.

Useful guides

Page last reviewed: 20 June 2023

Page reviewed by Jasmine Hembury

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