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Different types of car loans and finance explained

Used car finance comes in a number of different forms; you’ve more than one option. While it may feel like these are endless, and even a little daunting, there’s actually less than you’d think. HP, PCP, PCH, So what do they all mean? And which one is the right one for you?

Hire Purchase Personal Contract Purchase Personal Loan Conditional Sale
Requires initial deposit Optional Optional Optional
You own the car outright
Car is yours at the end of the agreement
Fixed monthly payments
Optional baloon (final payment)
Excess mileage charges
Secured against an asset (eg. car)

Hire Purchase
What Is It and What Makes it Different?

The simplest form of finance – a loan linked to, and/or secured upon, the value of the car you’re buying. Your Finance Term and Repayments are both Fixed, so you always know what you’ll be paying.

Hire Purchase

What Is It and What Makes it Different?

Flexibility is the name of the game with a PCP agreement: when you reach the end of your finance term you can Hand The Car Back, Swap To a Newer Model or Pay a Balloon Payment to buy the car outright. No wonder it’s the UKs’ most popular form of Car Finance.


Conditional Sale
What Is It and What Makes it Different?

Much like Hire Purchase, a Conditional Sale is one of the simplest ways of financing your car. Unlike Hire Purchase, however, you’re committed to buying the car from the moment you pay your deposit. There is no option to hand the car back and no “Option To Purchase” fee.

Conditional Sale

Personal Loan
What Is It and What Makes it Different?

A Personal Loan is different to other forms of Car Finance in that it’s arranged directly with a Finance Provider, Separate from the Dealership or Retailer. They are usually Unsecured.

Personal Loan

Compare our Top 5 Car Finance Lenders

Finding the right lender can be confusing but the comparison table below aims to help clarify your options.

JBR V12 Close Brothers Tandem MotoNovo
Hire Purchase
Personal Contract Hire Lease Purchase
Age Min-Max 21-80yrs old 21-80yrs old 18-70yrs old 18-80yrs old 18–no max
Joint Hirer
Provisional License
Gross Min Salary Affordability £1000 pm £1000 pm Affordability Affordability
Loan Value Min-Max £25,000 - £750,000 £3,000 - £55,000 £1,000 - £200,000 £2,500 - £125,000 £3000 - £75,000
Max Age of Vehicle at end of term No Limited 15yr HP - 9Yrs PCP 15yrs 15yrs 15yrs
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10 potential negatives to consider when taking out a Car Loan

  • Interest Costs

    Over the term of the loan, you’ll end up paying more for the car than if you had paid in cash due to interest payments.

  • Commitment

    Taking on a car loan means committing to a monthly payment for the duration of the loan, which can affect your budget and cash flow.

  • Repossession Risk

    If you fail to make payments, the lender could repossess the car, leaving you without transportation and negatively impacting your credit.

  • Fees and Penalties

    There might be hidden fees associated with the loan or penalties for paying off the loan early.

  • Complex Contracts

    Some car finance agreements can be complex, and you might not fully understand all the terms.

  • Risk of Negative Equity

    If your car depreciates faster than you’re paying off the loan, you could end up owing more on the loan than the car is worth.

  • Credit Impact

    If you fail to make timely payments, it can harm your credit score. On the other hand, taking on too much debt relative to your income can also negatively impact your creditworthiness.

  • Longer Loan Terms Can Mean More Total Interest

    If your car depreciates faster than you’re paying off the loan, you could end up owing more on the loan than the car is worth.

  • Impulse Buying

    Financing can sometimes lead to buying a more expensive car than you might have otherwise because the focus becomes on the manageable monthly payments rather than the total cost of the car.

  • Limitation on Vehicle Use

    Some finance agreements such as PCP might have clauses that limit how you can use the vehicle, milage limits for example.

SAF Approved Car Finance Specialists

We stand out not only as a respected car purchasing service in the UK but also as your dependable partner in obtaining car finance. With full authorisation from the Financial Conduct Authority and SAF endorsement, our skilled team is dedicated to assisting individuals by providing customised financial solutions. We assess offerings from more than 17 distinct car finance institutions, guaranteeing that you have the insights needed to secure competitive rates and drive with assurance.

Frequently Asked Questions

A car is likely to be the second most expensive purchase you will make in your life. Over a tonne of metal, glass and wiring will always cost and we don’t always have the cash on hand to afford it. If you don’t have Thousands of Pounds saved up and available, Finance can be an extremely useful and responsible choice.

Young drivers and Students, for example, may not have enough ready cast to buy a car outright but there are Car Finance Options available for Students that could put them on the road. Likewise, a growing family with a good income might still struggle to save in today’s economy.

The constant increase in the price of cars, new and used, is also putting new pressure on family finances. Buying on Finance can level this playing field by softening the upfront cost and spreading the cost over time. With great options for affordable used cars on Finance, PCP, Hire Purchase and Lease options put tens of thousands of cars within reach of buyers across the UK.

Car Finance can make buying a vehicle more affordable in the short term by spreading the cost of the vehicle over time. This can help buyers to slot the purchase into their regular outgoings without spending months or years saving up for a vehicle. Circumstances can often change so quickly that buying outright is not always an option.

As with all big purchases, however, it is wise to ensure that you choose wisely. Car Finance comes with additional charges and interest payments (together called APR) which might make your car more expensive in the long run. It’s a good idea to use a car finance calculator to see just how much you could be spending overall. If your income or credit history aren’t as good as you’d like then these additional costs can go up, though there are plenty of options for Finance in these circumstances, even if you’re claiming benefits.

One area that’s becoming an increasing issue for Financing is Negative Equity. This is when the value of the car drops below the amount you’re paying back. This is less of a problem on the used market, however.

As with every major financial decision, it pays to shop around. Different lenders charge different rates and offer different benefits. This is especially true if you have a bad Credit Rating or you’ve been declined in the past.

The temptation is to go with the Finance offered by the Dealership. This is certainly a very simple choice but it’s not compulsory – you can apply to an independent Lender. You can also apply to your bank for Personal Loan Car Finance, which may bundle in benefits from your long association with them.

If you’ve had trouble with finances in the past, a specialist lender, like the ones we work with at ChooseMyCar, can often be the best option. Our specialists can also help you to choose the best value cars to buy on Finance, depending on your situation.

Can You Get Car Finance Online?

Yes, you can get cheap Car Finance Online – either directly or via a broker. While there is paperwork to fill in and evidence to present, all of this can now be arranged digitally in most cases.

Evidence can often be photocopied or photographed and paperwork can now be signed with a digital signature. It may still be that a phone call is required, especially if the arrangements are a little more complicated – with Self Employed Car Finance, for example. The rules over which evidence will secure your finance might need a call to understand.

Other Finance packages like Guarantor Loans or No Deposit Car Finance might also require a little more input. Overall, however, you needn’t have to set up a meeting face to face and most of the arrangements can now be made digitally.

Is It Dumb to Pay Cash for a Car?

Paying cash for a car does have a few advantages. Firstly, the fees and interest will be lower, if they exist at all. This will save you money overall. Secondly, you get to own and drive away with the car instantly, whereas you don’t own your car until all payments are made with Hire Purchase or PCP. You never own the car with a Lease.

If you’re too young to have built up savings to buy a car outright, however, cash may not be an option whereas Young Drivers Car Finance is a possibility.

Circumstances can also change very quickly. If you discover that you’re about to become a parent for the first time or you’ve just landed a new job that requires a flexible commute, saving up the money to buy a car with cash might not be realistic. This is where Finance can come in really handy. Even if you’ve a low Credit Score and don’t think it possible without boosting your Credit History, Finance options exist which could help you out.

This depends on the type of Finance you choose.

With Hire Purchase finance, you automatically become the sole owner of your car from the moment that your last payment is made. You can then sell it on or keep driving it without any further input from your Lender.
With PCP finance, however, owning the car at the end of your agreement is a choice you must consider. With PCP finance, you have three choices at the end of your Finance: upgrade to a new car, hand your car back or buy it by paying a lump sum. How much this lump sum (known as a Balloon Payment) is depends on the cost of your car and your initial down payment, so it’s worth carefully considering what car you can afford if you want to buy on a PCP.

With a Lease, you don’t get an opportunity to buy your car – it goes back to the Leasing company. The advantage of this is that your monthly payments, including APR, tend to be lower.

So long as they’re insured to do so, yes. The rules about other people driving your car are the same, whether you’ve purchased it through finance or paid in cash.

The most important consideration is what happens if something happens while they’re driving it. If it’s written off without the driver being insured to drive it, you will still have to pay the remaining finance. If the car is an expensive one, with a considerable GFV, you could be stuck with an expensive bill that your Lender will insist that you pay.

If the driver is insured then you’ll get much of that back. If the insurance includes GAP cover then you may get the full amount back. In either case, another insured person is allowed to drive your car.

The exact documentation you need to secure Car Finance from a Lender depends on the Lender you’re approaching. Generally, however, they ask for the following three things:

● Proof of identity.
● Evidence that you can afford the car.
● Your address history.

Proof of identity might be your driving license or birth certificate. Evidence of your ability to afford the repayments might include copies of payslips and a look at your Credit Score. Their required Credit Score will, again, depend on the Lender and your personal circumstances.

Your address history helps in checking your Credit History. Old bills or correspondence usually suffices. Establishing your Credit History and your Credit Score will then help them to assess your suitability for finance, especially if you’re looking for Low Rate Car Finance.

Car Finance terms can last anywhere between 2 and 5 years. The length of your finance is up to you. Choose your down payment, talk to your dealership about any Deposit Contributions, pick the number of years you’d like to pay and off you go.

Be aware, of course, that while a longer term might give you lower monthly payments, you could end up paying more overall. There’s also the question of Selling Your Car with Outstanding Finance, which you might want to do. 5 years is a very long time in car technology, especially when it comes to EVs. Check out our Car Finance Guides for more details.