If you do not keep up the repayments on your car finance, your vehicle may be repossessed. You could be responsible for covering any shortfall in value, any extra fees and interest. Your credit score may also be affected.

What is car finance?

Car finance is a secured loan specifically designed for buying a vehicle. You can use car finance to buy new or used vehicles.

The finance agreement is normally secured against the vehicle you buy. You do not own the vehicle until the agreement ends.

When you apply for a car loan, the lender runs a credit check. Your credit file will show the lender if you can afford to repay the loan.

Always check your credit score before you apply for any kind of loan.

Car dealerships often offer car finance with their vehicles, but they may not have the best rates. Shop around and get quotes from other lenders before signing an agreement.

You can use car finance for other vehicles, including:

  • Cars

  • Motorbikes

  • Vans

  • HGVs

  • Caravans

  • Motorhomes

What is a car loan?

A car loan is a personal loan you can use to buy a vehicle outright.

With a car loan, you own the vehicle straight away and pay off the loan balance to the lender. The lender has no claim on your car because the loan is unsecured.

The biggest personal loan you can get is usually 25,000, though some lenders may allow up to 50,000. Personal loans tend to last between 1 and 7 years.

What's the difference between car finance and a car loan?

Car finance and car loans are different products. The differences include:

Car financeCar loan
Secured loanUnsecured loan
Only own car when loan is paid offOwn car straight away
Can buy with a small deposit (10%)No deposit needed

What are the costs of car finance?

How much car finance costs depends on the type of vehicle finance you choose.

The main costs are:

  • The deposit you pay upfront to get your vehicle. You do not always have to pay a deposit but it will reduce your monthly payments

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

  • The fees cover things like damaging the vehicle, exceeding your mileage limit or missing payments. There may be a purchase fee too

What types of car finance are there?

There are several types of car finance to choose from. 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 gradually pay off the rest. You normally have between 1 and 5 years to pay it off.

For example, you buy a new car for 12,000 with a 2,000 deposit. You can then pay off the remaining 10,000 over the next 5 years.

At the end of the hire purchase agreement you'll have paid off the vehicle.

  • 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)

Personal Contract Purchases, or Personal Contract Plans (PCPs) are often sold by car dealerships with the car. They normally last for between 2 and 4 years.

You pay a deposit at the start and then pay monthly instalments for the duration of the term. You may not have fully paid off the vehicle by the end 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 and pay a 1,000 deposit. Your monthly instalments over 3 years total 5,000, leaving 6,000 left to pay. You'll have to pay this to clear the debt and own the vehicle outright.

If you decide not to pay the final payment you can return the car. Or, you could exchange it for a new PCP agreement and get a new car from the same dealership.

  • Lower monthly payments

  • Small deposit needed

  • Flexibility at end of agreement

  • Mileage limits

  • Potentially large payment at the end of the term

  • Only own vehicle at the end

You can return the car early and cancel your PCP early if you've made at least half of the payments on your agreement. This is called a voluntary termination.

The guaranteed minimum future value is the minimum amount of money your car will be worth at the end of your PCP agreement.

Conditional sale agreements

Conditional sale agreements are very similar to PCPs, except the final payment is compulsory.

You do not have the option to return the vehicle rather than pay off the loan. They are much less common than PCPs but some lenders still offer them.

Personal Contract Hire (PCH)

A PCH is when you rent a vehicle from a car dealership. This means you never fully own the car.

The rental payments cover the depreciating value of the vehicle over time. You'll need to agree on mileage limits with the dealership.

PCH agreements are popular with businesses that offer their employees company cars.

  • Low repayments

  • Depreciating value does not affect the driver

  • Few maintenance costs

  • Mileage limits

  • Must get comprehensive insurance

  • Never own the vehicle

Logbook loans

Logbook loans are loans that are secured against the value of your car. They are not specifically designed for you to buy a car.

What are the alternatives to car finance?

Car finance is not always the best way to buy a vehicle. Alternatives include:

  • Cash is often the cheapest option. It does not require a credit check and means you'll own the vehicle outright straight away. You may be able to get a discount if you pay with cash

  • A money transfer is where you transfer cash from a credit card into your bank account to buy your car. You have to pay a transfer fee, which is around 4%. You'll have a set number of months to pay off the balance interest-free

  • Arranged overdrafts allow you to borrow money from your bank account to pay for your vehicle. But interest rates on overdrafts can be expensive

Other costs to consider before buying a car with car finance

Remember to factor in other costs of running your vehicle, including:

  • Car insurance

  • Road tax

  • Petrol

  • Breakdown cover

Be sure you can cover these costs as well as the loan repayments before you buy the car. If it will be too much of a stretch, it might be worth looking for a cheaper car. Second hand cars can be around 30% cheaper than new cars.

How to pay back your car finance

You'll most likely pay by monthly direct debit until the end of your agreed term.

You'll have to pay a fee if you miss a payment. Your finance agreement should state how much this will be.

If you miss several payments, the lender could repossess your vehicle. They'll probably add a default notice to your credit record. This could harm your chances of getting a loan in the future.

Vehicle finance FAQs

Q

Will I have to pass a credit check to get car finance?

A

Yes. When you apply for car finance, the lender will check your credit file.

Q

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

A

You'll still have to pay the rest of the finance agreement. This is why it's important to have comprehensive car insurance.

Q

Can I modify my vehicle if I bought it with car finance?

A

Yes, but you have to ask permission from the finance company. If you used a car loan to buy the vehicle, you can make whatever changes you want.

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

You do not have to have gap insurance. It protects your finances if you write off your car before the end of your finance agreement, but it can be expensive.

Q

Can I sell my vehicle before the finance agreement ends?

A

You need permission from the finance company 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 pay a small fee.