What are the different types of car finance?
There are four main types of car finance available. Each option has different eligibility criteria and works in a different way. The best choice for you will depend on your individual needs and circumstances.
Hire Purchase (HP)
Hire purchase – or HP – car finance is one of the most popular ways to finance a used car. You’ll typically need to pay a deposit followed by fixed monthly repayments for between one and five years, depending on the terms of your agreement. The loan is secured against the car, so you won’t own it during the contract term, but once you’ve finished making all the repayments, it will be yours.
While you will be responsible for the car’s insurance and upkeep during the loan, it’s unlikely that you’ll need to agree to any mileage restrictions. You may also need to pay a small Option to Purchase fee (typically between £100 and £200) at the end of your agreement to cover the admin costs associated with taking ownership of the vehicle.
Personal Contract Purchase (PCP)
Personal contract purchase – or PCP – is similar to HP car finance but is often seen as a more flexible option. You’ll typically be asked to put down a deposit and then make monthly repayments throughout the loan term. These will usually be lower than they would be with HP, as you don’t need to borrow the full value of the car. Instead, you’ll borrow the amount of value that the lender thinks your car will lose over the loan term – this is the difference between its purchase price and the Guaranteed Minimum Future Value (GMFV).
PCP agreements often last between two and four years, and when you reach the end of the term, you have some options. You can choose to return the car to the lender and walk away, purchase the vehicle by paying a one-off balloon payment (equivalent to the GMFV) or use any positive equity remaining in it towards a new car.
A personal car loan works differently from other car finance types, as it isn’t secured against the vehicle. Instead, as soon as you’ve used the loan to pay the seller of the vehicle, you’ll take ownership of the car. You will need to agree to repay the loan over a set period, but if you keep up with your payments, you can do whatever you like with the car, including selling or modifying it. As the loan is unsecured, borrowers typically need to have a strong credit score to be eligible.
Leasing is a form of long-term car rental that typically lasts two to three years. You’ll need to pay a set monthly amount throughout the lease term as well as agree to a mileage limit. It’s important that you don’t exceed this limit or damage the car, as you might be asked to pay additional charges. Once your lease comes to an end, you can renew it or simply hand the car back.
0% Car Finance
When looking at finance options for cars, you might come across advertisements for 0% car finance. This type of loan is often only available on brand new cars and requires the borrower to have a strong credit rating. With a 0% APR finance deal, you can spread the cost of a new car over several years, but you won’t be charged any interest.
If it sounds too good to be true, make sure you do your due diligence. Check whether any added charges or fees apply and that you aren’t being asked to pay an inflated purchase price to compensate for not paying interest.
No Deposit Car Finance
Some car finance options will not require you to put down a deposit. No deposit car finance is available from some lenders, and they won’t ask you to pay anything upfront. There’s also no deposit needed with a personal loan, although you might need to pay a small reservation fee to secure the vehicle.
Keep in mind that choosing no deposit finance might mean that you need to borrow more to buy the car, potentially increasing your monthly repayment amount.
Bad Credit Car Finance
While it’s not the only factor that lenders consider, a bad credit score can restrict your access to the best deals on car finance. Your credit score is used to indicate how you might behave as a borrower, and if you’ve missed payments in the past, you could pose a higher risk to lenders.
Even so, that doesn’t mean it’s the end of the road. If you’ve previously had debt problems, you might still be able to find bad credit car finance. There are lenders available who specialise in offering those with poor credit car finance in return for a higher rate of interest.
How to get the best car finance deal
The best car finance deal for you will depend on your personal preferences and individual financial situation. When deciding between PCP, HP, a personal loan, or leasing, you should consider a few different factors:
New or used car?
Leasing is often only available on new cars, while hire purchase may allow you to split the cost of an affordable used car into manageable monthly repayments. Because of its structure, PCP car finance may allow you to upgrade your vehicle more frequently.
How is your credit score?
Certain car finance types, such as a personal loan, require you to have a good credit score, while others are more accessible to those with poor credit histories.
Do you want to own your car?
Hire purchase deals or personal loans offer the possibility to own a car outright, unlike PCP or leasing.
How much do you want to pay each month?
You may prefer to keep your monthly payments as low as possible by opting for a PCP loan or an HP agreement over a longer loan term. However, if you would prefer to have a shorter agreement term with higher monthly repayments but pay less interest, another type of car finance might be preferable.
How do you plan to use your car?
If you plan to travel a lot of long distances or tackle hard terrain that might cause damage, then you might prefer to find a car finance agreement that doesn’t include any mileage or damage limitations.
Can I get car finance as a young driver?
In the UK, you must be over 18 years old to legally sign a car finance agreement. However, it can be difficult to get accepted for car finance as a young driver. This can be for a number of different reasons. Perhaps you don’t have a secure form of employment, or you’re still a student, or have never had any credit before.
If you don’t have a credit history, it’s hard for lenders to know whether you’ll be a responsible borrower and can afford your monthly finance repayments. But you don’t have to give up. In these instances, you might be eligible to apply for joint car finance or appoint a guarantor who agrees to step in and make payments on your behalf if you can’t.
Get Car Finance up to £100,000
- Check your eligibility without impacting your credit score
- No deposit needed
- Rates from 9.9%* APR
*Representative example: Borrowing £6,500 over 5 years with a representative APR of 19.9%, an annual interest rate of 19.9% (Fixed) and a deposit of £0.00, the amount payable would be £166.07 per month, with a total cost of credit of £3,464.37 and a total amount payable of £9,964.37. Rates may differ as they are dependent on individual circumstances. Subject to status. We're a credit broker, not a lender.