UK Credit Guide: Car Finance


For most people, having a vehicle is a necessity for their day to day life. Whether it’s for commuting, shopping trips, medical appointments or school runs we can all appreciate the convenience it provides. So, when it’s time for an upgrade unless you’re lucky enough to have the money sitting waiting in your bank account, you’ll likely be looking at ways to finance your new purchase.

What is car finance?

Car finance is a broad term for credit taken out with the intention of purchasing a vehicle. Most of them function in the same way as any other form of loan but generally require the borrower to put down a deposit to secure the vehicle. The loan is also likely to be secured against the vehicle, giving the lender some extra security in the event of non-repayment.

Types of car finance

Hire Purchase (HP)
Hire purchase is a form of secured loan which usually requires a deposit of around 10% with the rest of the cost of the car repaid in fixed monthly repayments, similar to any other loan. You won’t be the legal owner of the car until you have fully repaid the loan, and any extra fees incurred if you go over the allowed mileage, or damage the vehicle.
As hire purchases are secured against the vehicle, the lender will be able to repossess the vehicle if the repayments aren’t made. There are often special clauses in the agreement which change the rules on how the lender can do this depending on how much of the cost has been repaid.

Personal Contract Purchase (PCP)
PCP is similar to HP in that it requires an initial deposit, followed by fixed monthly repayments, though these are often lower than those of HP agreements. The biggest difference though is that the amount borrowed does not cover the full cost of the vehicle. Instead, it covers the difference between the value of the car at the time and the predicted value at the end of the loan term. This means there are several options for you to choose from when it comes to the end of the loan term, depending on whether you want to keep the car or not.

You might get the option to:

  1. Make a ‘balloon payment’ to cover the rest of the value of the car and keep it.
  2. Return the car to the dealer and exchange it for another vehicle. If the market value of the car is higher than the value the dealer predicted originally, you can put the difference towards your deposit for the new vehicle.
  3. Return the car to the dealer, pay any fees or charges and end the agreement.

Leasing
Leasing a vehicle is another option for financing the use of a vehicle, though you’ll never actually own it. Similar to HP and PCP, leasing will require an initial deposit followed by fixed monthly repayments, however, unlike HP and PCP the maintenance costs for the vehicle such as servicing, are handled by the dealer and included within the monthly repayments. This could be beneficial to those who don’t want the hassle of servicing and maintaining the car and there is also no concern about the cost of the car depreciating as you simply hand it back to the dealer at the end of the fixed period. The downside to leasing is that it may cost more than other finance options as the monthly payments will include the cost of maintenance.

Personal loans
Some people chose to take out a personal loan to purchase their vehicle as there is no risk of repossession if the repayments aren’t made. Unlike other forms of finance, personal loans don’t require a deposit, making them more attractive to those who don’t have access to cash to put towards the cost. Personal loans rates do vary meaning this may only be a cheaper option for those with a good credit history, others may find they are subject to more expensive rates of interest.

Car finance for used vehicles

With the rising cost of new vehicles, it’s no surprise that many people are looking to purchase second hand instead. Dealers will commonly offer similar secured finance options on used vehicles as those offered on new vehicles, however, they will usually be at higher interest rates. This is due to manufacturers wanting to improve new car sales, so they try and tempt buyers with too-good-to-miss deals.

You should seek independent financial advice before taking out any new form of credit. They will be able to provide impartial views on the options available and help you decide which is best for your own situation.

Please note, none of these articles are intended to constitute financial advice and should be used for informational purposes only.