Car finance

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%.

Pros

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

Cons

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

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.

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.