Car finance is one of the most popular ways to own a car in the UK. Financing a car allows you to make monthly payments towards to cost of your chosen vehicle and pay for it over a number of years. If you’ve never taken out car finance before, you may be wondering how car finance works and whether its right for you. It’s also worth remembering car finance is never guaranteed, and you will need a finance approval first before you can go ahead but we will go into this in more detail soon. There are also various types of car finance agreements which may suit you more than others. In this guide, we will explain how financing a car works, and which type of car finance agreement is right for your personal circumstances – let’s take a look. 

What is car finance? 

Getting a car on finance UK is a straightforward way to borrow money from a lender to fund your car purchase. Car finance payments can be split into monthly payments across 1-5 years, depending on the type of car finance agreement you choose. Most car finance agreements will require you to pay interest, but some new cars can have 0% interest deals on them. Your interest rate will vary based on a number of factors such as length of term loan, your credit score, the loan amount, and deposit contribution. Interest rate can be factored into your monthly payments and the lower the interest rate offered, the less you will pay back overall. 

Types of car finance agreements UK

In the UK, there are a number of car finance agreements which tend to be the most popular. There are more to choose from but the most straightforward way to finance a car can be by using a personal loan, a hire purchase deal, or a personal contract purchase agreement. Each agreement has the same underlying principle where you borrow money and pay it back monthly in instalments with added interest but they each differ in other ways. Let’s take a look at each in more detail. 

Personal loan

A personal loan can be the cheapest way to finance your next car if you have a good credit score and are able to make the repayments. Personal loans can offer low interest rates but can be harder to obtain if you’ve had problems in the past meeting payment deadlines. A personal loan is when you borrow an amount from a lender and have it deposited into your bank account. This allows you to get the car you want from a dealer or private seller. Because you buy the car outright, you will be the legal owner of the car from the start and can choose to modify or sell the car when you like. You’ll pay the lender back each month with added interest until the end of you finance term. 

Hire purchase 

Hire purchase car finance is a straightforward car finance agreement. You would apply for finance on the vehicle of your choice and if accepted you will make monthly payments with interest till the end of the term. Hire purchase agreements are usually taken over 1-5 years and are a type of secured loan. This means the lender owns the car until the final payment or small ‘option to purchase’ fee has been made, then the ownership transfers to the borrower. Hire purchase can be suited to people with low credit scores as the car can be used as collateral by the lender. This means if you fail to meet your repayments, the lender has the right to take the car off you. You can’t sell or modify the car in this time as you won’t own the car until the end of the agreement. 

Personal Contract Purchase

Personal Contract Purchase agreements or PCP car finance is a form of hire purchase. PCP finance used cars or new cars can be a flexible way to fund your next car purchase. Like hire purchase you borrow an amount on your chosen car and pay it back monthly with interest. Unlike hire purchase, you don’t cover the full cost of the car but instead make monthly payments to pay for part of the car, this makes PCP payments lower than other options. Instead, at the end of the agreement you have 3 options. You can choose to pay the large balloon payment and keep the car, use the value towards another PCP deal on another car or hand the car back to the dealer. You will need to stick to an agreed mileage limit, and you can also incur additional fees if the vehicle is damaged throughout the agreement.