What is vehicle finance?

It is a way of borrowing money to buy a vehicle. The finance agreement is normally secured against the vehicle you buy, and you do not own the vehicle until the agreement ends.

When you apply the lender decides if you can afford the finance and runs a credit check.

While vehicle finance is often sold by car dealerships at the same time as their vehicles, you can shop around and get quotes from other lenders to get a better deal.

You can use vehicle finance to buy brand new or second hand vehicles, including:

  • Cars

  • Motorbikes

  • Vans

  • HGVs

  • Caravans

  • Motorhomes

What is a car loan?

It is a cash loan that is used to buy a vehicle - you own the car straightaway and owe the loan balance to the lender.

What are the costs?

This depends on the type of vehicle finance you choose, the main costs are:

  • The deposit: This is the money you pay upfront to get your vehicle. You do not always have to pay one, but if you do, a larger deposit may reduce your monthly payments.

  • The interest: This is the cost of borrowing money over the term of your agreement. Most agreements charge interest, but you can sometimes find 0% or low rates.

  • The fees: This is charged for things like damaging the vehicle, exceeding your mileage limit or missing payments. There may be a purchase fee too, so check carefully.

What types are there?

There are several types you can choose from and they all have different pros and cons:

Hire purchase (HP)

With a hire purchase agreement, you put down a deposit to buy a vehicle and pay off the rest over time, normally between one and five years but sometimes longer.

For example, you buy a new car for 12,000 and put down a 2,000 deposit, the remaining 10,000 is repaid over the next five years.

At the end of the hire purchase agreement you will have paid off the vehicle in full and there is nothing further to pay.

  • Low interest rates

  • Flexible repayment term

  • No mileage restrictions

  • Higher monthly payments

  • Minimum 10% deposit needed

  • Only own vehicle at the end

Personal Contract Purchase (PCP)

Sometimes known as Personal Contract Plans, PCPs are often sold by dealerships alongside their vehicles - they normally last for between two and four years.

You pay a deposit at the start of the PCP and monthly instalments for the duration of the term. At the end of the plan, you can choose to pay a lump sum to buy the vehicle - this is sometimes called a balloon payment.

For example, you buy a new car for 12,000, pay a 1,000 deposit, pay instalments totalling 5,000 over three years and then pay a 6,000 lump sum to own the car.

If you decide not to pay the final payment you can either hand the car back, or exchange it for a new PCP agreement and get a new car from the dealership.

  • Lower monthly payments

  • Small deposit needed

  • Flexibility at end of agreement

  • Mileage limits

  • Pay optional lump sum to own car

  • Only own vehicle at the end

Personal contract hire (PCH)

This is when you rent a vehicle from a dealership - so you never actually own it. The rental payments cover how much the vehicle will depreciate over time.

For example, you choose a new car, set mileage limits for three years and pay monthly instalments. After three years, you hand the car back.

PCH agreements are popular with businesses who want to offer their employees company cars and never want to own the vehicle.

  • Low repayments

  • No concerns over depreciation

  • Few maintenance costs

  • Mileage limits

  • Must get comprehensive insurance

  • Never own the vehicle

Car loan

A car loan is a normal personal loan where you borrow the cash and use it to buy your vehicle. You will owe money to the lender but they will have no claim on your car.

For example, you borrow 12,000 and use it to buy a car. You owe the lender 12,000 and pay it back over the agreed term.

The most you can usually borrow using a personal loan is 25,000 and they can last for between one and seven years.

  • No mileage limits

  • No deposit needed

  • Own the car straightaway

  • Rates may be higher

  • Application may take longer

  • Risk of negative equity

What are the alternatives?

Vehicle finance is not always the best way to buy a vehicle, there are several alternatives, including:

  • Cash: This is often the cheapest option if you have the money available, is hassle free and will not involve a credit check.

  • 0% money transfers: This is where you transfer cash from a credit card into your bank account and use the money to buy your car. You pay a transfer fee (around 4%) and have a set number of months to pay off the balance interest free.

  • Overdrafts: This is where you borrow money from your bank account to pay for your vehicle but the interest rates on overdrafts can be expensive.

If you have the cash to buy the vehicle upfront, then you can sometimes get a discount when you buy it.

Before you buy

You need to be confident you can afford your choice, both now and for the duration of your finance agreement.

You need to factor in your running costs in your calculations including:

  • Car insurance

  • Road tax

  • Fuel

  • Breakdown cover

If you are unsure, look at a lower spec car or one with a smaller engine. Buying new comes at a cost too and you could save up to 30% off by going second hand.

Paying back your finance

Most agreements ask you to pay monthly by direct debit until the end of your term.

If you miss a payment

You will usually have to pay a fee, how much depends on your finance agreement.

If you miss several payments, the lender could take your vehicle away and add a default notice to your credit record.

Vehicle finance FAQs

Q

Will I have to pass a credit check?

A

Yes, when you apply your credit record will be checked by the lender.

Q

What happens if my car is written off before the end of the loan?

A

The finance agreement will still have to be paid. This is why it is important to have comprehensive car insurance.

Q

Can I modify my vehicle?

A

You cannot make modifications without permission from the finance company. If you bought it using a car loan you are free to make any changes.

Q

Can I part exchange my vehicle?

A

Yes, you can usually use your current vehicle as a deposit towards your vehicle finance agreement.

Q

Do I need gap insurance?

A

Gap insurance can protect your finances if you write off your car before the end of your finance agreement but can be expensive, find out more here.

Q

Can I sell my vehicle before the finance agreement ends?

A

You will need permission to sell your car if you have a PCP, HP or conditional sale agreement. If you have a car loan, you can sell at any time.

Q

Can I drive my vehicle abroad?

A

If you have a PCP, PCH, HP or conditional sale agreement you may need to get permission before you travel and there may be a small fee to pay.