Car Finance

Car Finance

Car finance lets you borrow money to spread the cost of a new or used car over fixed monthly repayments.

Finding the best car finance for you

By Laura Rettie, Personal Finance Journalist.

Laura Rettie

Car finance is a popular way for drivers to pay for a new car. Learn more about how car finance works and how to get the best deal for you.

What is car finance and how does it work?

Car finance is money you can borrow to buy a new or used car. Like with other forms of credit, you'll spread the repayment over a period of time and pay interest on top. 

There are different types of car finance - some allow you to buy the car outright, which means you own it as soon as you hand over the cash. Other types of car finance mean you don't own your vehicle until you have made the final payment.

At the end of the finance period, you’ll be able to either trade in you car or keep it, depending on the type of car finance you chose. 

Why use car finance?

Buying a new car often costs thousands of pounds, and if you don't own your home, it's likely your biggest asset.

For many people, being able to save enough money to buy a car upfront is unrealistic, which is why car finance is such a popular option. 

Car finance offers a easy way to buy or hire a car and enables you to budget for repayments by spreading the cost over a period of time. 

What are the different types of car finance?

When you don't have the cash to buy your car upfront, there are four main borrowing options for financing a car:

  • Personal car loan
  • Hire Purchase (HP)
  • Personal Contract Purchase (PCP)
  • Personal Contract Hire (PCH)

Personal car loan

Personal car loans offer fixed interest rates and monthly repayments. You’re able to choose how long it will take you to repay the loan; remember, the longer you take to repay what you owe, the more expensive the loan becomes. 

Personal car loans are a type of unsecured lending because they're not secured against an asset, such as your home.

As long as you have a good credit score and a regular income, car loans can be an effective way of spreading the cost of a car. Personal loans are offered by banks or direct lenders online and are ideal if you want to own your car immediately. Here's more about how personal loans work.

Hire purchase (HP)

With hire purchase agreements, you’re essentially hiring the car, and make monthly repayments that include interest. You won’t own the car until you’ve made the final payment.  

Most hire purchase agreements will require a deposit of at least 10%. If you pay a higher deposit, you’ll often get better repayment terms and you can choose how long it takes you to repay what you owe - usually up to five years. 

You’re often able to pay for a new car with HP direct via the car dealer, which can be arranged on the day you purchase the car. 

Personal contract purchase (PCP)

This way of financing a car can be the cheapest upfront, but works out more expensive overall if you want to own your car at the end of the contract.

PCP agreements function in a similar manner to hire purchase agreements, where you essentially rent the car. The distinction with PCP deals is that the loan amount covers the gap between the current value of the car and its projected value at the end of the agreement.

As with a normal loan, you pay a deposit and make monthly repayments with interest. Repayments are normally made between one and four years.

At the end of a PCP contract, you’ll have three options:

  • Exchange the car and start a new PCP
  • Pay to keep the car (known as a balloon payment)
  • Give the car back to the dealer

Through this method, the balloon payment can end up quite expensive, especially if the car has kept its value. Also, if you go over the agreed mileage, you'll have to pay extra.

Personal contract hire (PCH)

This is also known as 'leasing', so you don't ever get to own the car outright, but it can be cost-effective if you only need a car for a short term period.

When leasing a car, you’ll pay an initial deposit and make monthly payments. 

Bear in mind you may have to pay up to three months' worth of rent in advance and a large deposit to cover the cost of wear and tear. You may be able to add a service plan to your deal that ensures it's returned in good condition.

Which is the best financing option?

The best car loan is not always the cheapest car loan. In reality, the best car finance is what suits your driving needs and financial circumstances the most.

When considering your options, ask yourself:

  • Do you want a new or used car?
  • How much can you afford each month?
  • How much can you pay upfront?
  • Do you want to own the car outright?
  • Do you want to upgrade your car regularly?
  • How good is your credit score?

Your answers will help you find the best way to finance your car.

Once you've worked out the best car finance option for your needs, compare interest rates across different loans by looking for the Representative APR and check the small print for hidden charges or clauses.

How much does car finance cost?

It depends on the type of car finance you choose, the advertised APR and your credit rating. Typically the cost of a Personal Contract Plan or Hire Purchase comprises of:

  • A deposit
  • Monthly instalments + interest
  • Final or balloon payment (optional)

You could incur additional charges if you exceed the agreed mileage or need to pay for servicing the car. 

Sometimes the best way to get a cheap car loan is to take out a low interest [personal loan] with a flexible repayment option.

What are the advantages and disadvantages of car loans?

Using finance for any purchase comes with risks, so it's important to weigh up the advantages and disadvantages before taking a car loan to buy a vehicle.

Here are some of the pros and cons of using a personal car loan to finance a car:


  • You own the car outright
  • Often cheaper than dealer finance
  • Simple and quick to arrange
  • You have control over payment terms
  • You can soft check your loan eligibility before applying
  • You can buy your car from a dealer or private seller


  • You need a good credit score to get a low-interest rate
  • Harder to get approval than other car finance
  • The car's value will depreciate over time
  • You'll be responsible for all repairs
  • You can't simply trade it in for a new car

What are the advantages and disadvantages of car finance from a dealership?

If you decide car financing with PCP or HP is right for you, here are the main pros and cons to consider:


  • Monthly repayments may be lower (PCP)
  • Only borrow part of the purchase price
  • Swap or upgrade your car often
  • Save up while you hire the car
  • No lump sum payment to own the car (HP)


  • A minimum deposit is required
  • Mileage restrictions may apply
  • You could go into negative equity
  • The car isn't yours until the term ends
  • Monthly repayments could be higher (HP)
  • You'll need a lump sum to own the car at the end of the agreement (PCP)

Can you get car finance with bad credit?

Yes, it may be harder to get approval and be more expensive, but getting a bad credit car loan is possible. Here are some of the things you can do to increase your chances of getting bad credit car finance:

  1. Make sure you check your credit report regularly; many websites and apps will let you monitor your credit report for free. You should try and take steps to boost your credit score, such as clearing any debts or making credit repayments on time and in full. Once you've achieved this, you'll have a greater chance of approval for your car loan.
  2. Using a specialist broker will ensure that you’re matched with a lender who is most likely to accept you. A specialist broker will look to find you the best car loan interest rates too.
  3. Try not to apply for multiple car finance products, each time you apply the lender will carry out a hard credit check. Too many hard credit checks will further damage your credit record and make it more difficult for you to get approved for credit in the future.

What should I consider before I take out a car loan?

To get the best car finance deal, weigh up how much you can afford to pay upfront and how much you can pay monthly.

Once you have worked out your budget, do the following:

Check the APR and 'total cost of credit', including any extra fees and charges you may need to pay for early, late or missed repayments. Be realistic about how much you can afford to pay each month and consider the cost of borrowing carefully.

Check and improve your credit score to get the best car loan rates. Get a copy of your credit report to check there are no mistakes and make any simple changes like ensuring you are on the 'electoral roll' and all your repayments are up to date.

Shop around and get quotes using price comparison websites, insurance brokers and specialist car finance sites, so you know what to expect before applying for a car loan or signing a credit agreement.

What do I need to apply for a car loan?

A car loan is a type of credit, so you'll be asked to provide ID and other types of evidence to show you are creditworthy and can afford the loan.

You'll usually be asked to provide:

  • Proof of identity, such as your driving licence or passport
  • Proof of income, such as wage slips or bank statements
  • Proof of a current UK residence and address history for the past three years

The lender will also need to carry out a credit check, which may show up on your credit record.

Are there any alternatives to car loans?

Credit card: If you only intend to use your credit card for part payment, this can be a decent option if you use a 0% interest purchase card and pay off the credit within the period.

Leasing: Also known as Personal Contract Hire (PCH), this arrangement allows you to hire a new car for a set number of years and return it at the end of the lease period. You will not own the car, so it is basically a long-term car rental.

Guarantor car loans: Guarantor car finance is a type of car loan where someone else (usually a close friend or family member) guarantees that the loan repayments will be made if you can't make your repayments. They will need to undergo affordability and credit checks. This is a possible option for young drivers and those with bad credit.

Secured loans: This is also known as a homeowner loan, and it's a loan secured against your home or a property you own. Your home equity is used as collateral, which means if you can't repay the loan, the equity in your property will be used to cover the debt.

Secured loans are usually for borrowing more than £10,000, so if you're after a cheaper car, it's not the best option. However, interest rates are often lower than personal loans or credit cards, and it's an option worth considering if your credit score is low.

The information provided does not constitute financial advice, it’s always important to do your own research to ensure a financial product is right for your circumstances. If you’re unsure you should contact an independent financial advisor.

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Frequently asked questions

What happens if I can't repay the car loan?

If you miss payments or make regular late payments, this could affect your credit rating or your ability to get credit in future. You will also be charged fees for late or missed payments.

If you think you may struggle to meet the repayments in future because of a change of circumstances, contact your lender as soon as possible to discuss.

Can I terminate my car finance?

Yes, you have the right to cancel some types of car finance agreements early, according to the law. It's called voluntary termination, and the Consumer Credit Act says that in some circumstances, you can cancel your HP or PCP agreement. 

You will have to have paid off over 50% of the loan in most circumstances. Contact your finance company if you are struggling to make repayments or want to cancel the agreement early.

Can you buy used cars on finance?

Yes, you can get used car finance, and it works in exactly the same way as car finance for new cars.  

As with new car finance, the best car loan option for you will depend on the car's value, where you bought it and whether you want to own it immediately, at the end of the repayment period or trade-in.

What is APR?

The annual percentage rate (APR) is the rate displayed to help you work out the cost of borrowing. It includes the interest rate and any extra charges for the loan. All finance companies have to provide a representative example and tell you the APR of the loan before you sign a credit agreement.

The representative APR is an advertised rate that 51% of the people approved for credit will be offered. If your credit rating is poor or you have a low income, you could pay more than the representative APR being advertised.