How does Car Finance work?
Financing your car allows you to spread the cost of a vehicle over a set period, typically 12 to 60 months. Your credit score, chosen finance type, and other factors affect interest rates and repayment terms. Using a car loan calculator can help estimate monthly repayments and determine affordability.
Other Popular Vehicle Finance Calculators
- Compare the Market Vehicle Finance Calculator Everyone’s favourite Meerkat helps you burrow into your borrowing options
- Confused Vehicle Finance Calculator This tool estimates monthly payments based on different APR rates.
- Zuto Vehicle Finance Calculator Zuto estimates how much you can borrow based on your budget.
Hire Purchase (HP)
Hire Purchase is a straightforward financing option. You make an initial deposit (usually 10% of the vehicle’s value) and pay off the remainder in monthly installments over a fixed term. The interest rate is fixed, making budgeting easier. At the end of the term, you own the vehicle outright. HP deals are available for both new and used cars.
- Initial Deposit
Pay typically 10% of the car’s value.
- Monthly Payments
Fixed installments over 1-5 years.
- Ownership
At the end of the term, the car is yours.
Personal Contract Purchase (PCP)
Personal Contract Purchase is a flexible finance option ideal for those who like to change cars regularly. You finance the depreciation of the vehicle rather than its full value, resulting in lower monthly payments. At the end of the term, you have three options: pay a balloon payment to own the car, hand it back, or trade it in for a new model. PCP contracts typically have mileage restrictions.
- 1Lower Monthly Payments
Finance only the depreciation.
- 2Flexible End Options
Buy, return, or trade-in.
- 3Mileage Restrictions
Limits to maintain car value.
Personal Contract Hire (PCH)
Not to be confused with the above finance methods, Personal Contract Hire is actually a Leasing option and not finance, even though it is a credit agreement, but it’s worth understanding the terminology. Essentially this is a long-term car rental with fixed monthly payments. You will never own the car but can drive a new vehicle every few years without worrying about depreciation.
To find out more about leasing, read our guide on Vehicle Leasing.
Unsecured Personal Loan
A personal loan lets you buy the car outright, giving you full ownership from day one. It’s not secured against the vehicle, offering flexibility to sell anytime.
You will have to approach your bank or other lending institution to secure this funding, in advance of your purchase. Because it is unsecured you will need a good credit rating to apply successfully, and they usually have a maximum limit of around £20k.
Specialised Loans - Other Financing Options
No deposit car finance allows you to finance a car without an upfront payment, spreading the total cost across monthly repayments. 0% interest finance deals, typically for new vehicles, can save you money but often require excellent credit ratings. Balloon Hire Purchase defers a portion of the car’s cost to the end of the agreement, reducing monthly payments but requiring a larger final payment.
Finance without upfront payment
Interest-free payments on select deals
Lower monthly, larger final payment
Car Loans for Challenging Situations
Guarantor car finance involves a third party agreeing to be responsible for the loan if you fail to make repayments, improving approval chances for those with bad credit. Many UK lenders offer specific bad credit car finance options, designed for individuals with less-than-perfect credit history, typically with higher interest rates and shorter repayment terms.
| Guarantor Finance | Bad Credit Finance |
|---|---|
| Involves third party | Higher interest rates |
| Improves approval chances | Shorter repayment terms |
| Guarantor needs good credit | May require larger deposits |
Making Your Finance Decision
When choosing your finance provider, consider early repayment options, potential penalty charges, and mileage restrictions. Compare deals from different lenders, including manufacturers, dealerships, and specialist providers. Used car finance has become increasingly popular, with most providers offering HP or PCP options for used vehicles.
Check deals from various lenders, including AA Finance, Black Horse Finance, Carfinance247, and others.
Utilise finance calculators to estimate monthly payments and total loan costs.
Review your credit score before applying to understand your position.
Keep up-to-date with the latest deals and rates in the market.
Top Vehicle Loan Specialists in the UK
If you are ready to apply for a quote, compare car finance deals from our partners: