6 Types of Car Finance in the UK

1. Hire Purchase to Own a Car Outright

Hire purchase (HP) is one of the simplest UK car finance types.

What happens with hire purchase?

HP allows you to spread the cost of the vehicle over a set period of time, with repayments usually made monthly. At the end of the hire purchase agreement, you’ll own the car outright, with nothing more to pay. Deposits aren’t always required, though they can help reduce your interest rate and monthly payments.

Hire purchase costs and terms

To calculate the total cost of your hire purchase agreement, simply take the price of the car, minus the deposit and add interest. You may also be liable for administration and transfer rights fees at the end of the loan, which are worth factoring in. Most hire purchase agreements span for between three to five years, although this can vary. Monthly payments are fixed, making it easy to budget and plan around your loan.

2. Conditional Sale Car Finance Agreement

Similar to a HP agreement, conditional sale loans are a great option if you want to own your car outright at the end of the contract.

What to expect from a conditional sale

Fixed monthly payments are a little higher though there are no additional fees at the end of the agreement. Deposits are usually 10% of the car’s value and repayment terms can be anywhere from two to six years, allowing for plenty of flexibility for a brand-new car.

Conditional sale vs hire purchase

What’s the difference between hire purchase (HP) and a conditional sale? Sometimes, the terms are used interchangeably. However, conditional sales specifically include a condition that you don’t own the vehicle until the final instalment has been paid. That means your lender can repossess your car if you fall behind with payments. This condition may also be included on HP car finance agreements though.

3. Personal Contract Purchase

Personal contract purchase (PCP) is one of the most popular types of UK car finance options and for good reason.

Understanding personal contract purchase

Fixed monthly repayments are lower than HP loans, which allows you to consider newer, higher-spec vehicles without blowing the budget. You may need to make an initial deposit worth around 10% of the car’s value, and then you’ll continue to make repayments over the lifetime of the loan, usually between two and four years.

Balloon payments on PCP deals

When you’ve made your final instalment, you have the option to make a ‘balloon payment’ to gain ownership of the vehicle. The balloon payment is a final payment which covers the minimum future value of the car at the end of the PCP agreement. Another way of looking at it is that your monthly payments cover the car’s depreciation in value, while the final balloon payment covers the actual cost of the vehicle.

Alternatively, you can opt out of the large, lump sum payment. This will end your personal contract purchase (PCP) agreement, so you’re free to find a car elsewhere. However, you can also start a new PCP deal and swap the car for a new model, making PCP loans popular with motorists who like to change cars for the latest bells and whistles.

Guaranteed Future Value explained

Most PCP loans require you to estimate your expected annual mileage, which is used to calculate Guaranteed Future Value (GFV). This figure predicts the value of the car at the end of the loan based on a maximum annual mileage allowance. Without a mileage limit, it’s hard to predict how a car loses value as the same car would be worth a significantly different amount if it has been driven 50,000 miles or 15,000 miles, for example. As such, if you go over your pre-agreed mileage limit you may incur penalty charges as this reduces the guaranteed minimum future value.

4. Personal Loan

Few major purchases cost as much as a car, so it’s no surprise that a personal loan is another option to cover your payment to a car dealer or private seller.

Getting a personal loan to finance a car

Personal loans see you borrow the total amount needed to purchase a car, then pay back a fixed amount in monthly instalments. You’ll also have to pay interest on the amount borrowed, based on an annual percentage rate.

Advantages of a personal loan

You’ll own the vehicle outright, which makes a personal loan appealing to motorists who want complete freedom when it comes to mileage, wear and tear, customisation and other liberties. You’re also free to sell the car at any time with a personal loan. Borrowers with good credit profiles can generally unlock the best interest rates and personal loan terms.

5. Guarantor Loan

For borrowers with a bad credit history, guarantor loans are one of the most appealing car finance types in the UK.

How guarantor loans work

A third party, usually a family member, agrees to ‘guarantee’ the personal loan or car finance with a bank, finance company or car dealership and step up if you can’t make monthly payments. It’s a big responsibility for both you and the guarantor and so shouldn’t be entered into lightly.

How does it differ from a personal loan?

This carries many of the same benefits as a personal loan, depending on who you’re borrowing from. A guarantor loan from a bank means the vehicle is fully paid, so you can make customisations or even sell it if needed. Bear in mind that your guarantor’s credit rating may also come into play when applying for this type of personal loan or finance.

6. Personal Contract Hire (PCH)

Also known as leasing or a lease agreement, personal contract hire allows you to rent a vehicle for the lifetime of the agreement.

How does personal contract hire work?

Contracts start with an initial cash deposit followed by low monthly payments to cover the cost of the lease. The value of your monthly payments is determined using your expected annual mileage and the length of your lease. This is because both variables play a big role in the value of the vehicle at the end of your contract.

What happens at the end of your PCH deal?

At the end of the agreement, you return the car to the dealer, with no option to purchase it outright. Most people choose to start a new PCH contract, which gets you the keys to a brand-new vehicle. If you love fresh leather seats, cutting-edge technology and that sought-after new car smell, you’ll love PCH loans.

Added benefits of PCH

You’ll also sidestep depreciation, as well as enjoy perks like breakdown cover, waived road tax and complete coverage under the manufacturer’s warranty. For legions of motorists, the hassle-free nature of PCH makes it one of the most desirable UK car finance types.

Beware the mileage limits

As you might expect, PCH deals come with strict mileage limits. That’s because this car finance option doesn’t include the option to purchase, so the vehicle will be returned at the end of your car loan. If you exceed your mileage allowance, you’ll need to pay additional charges to cover the unexpected depreciation to the car’s value. That said, it is still one of the most popular finance methods.

What’s the best type of car finance for you?

When you’re choosing between different car finance options, there are a few things to bear in mind.

Your credit rating

Firstly, your credit rating. If you don’t have a good credit score, you may struggle to get approved for personal loans. That means you’ll need to opt for one of the other forms of car finance.

Instead of an unsecured loan, drivers with a poor credit history can opt for PCP finance, hire purchase and conditional sale car finance deals. These are classed as secured loans because the vehicle is an asset for the finance company. In other words, it can be repossessed in exchange for outstanding finance.

Balloon payments

Another big consideration is the balloon payment. You may know already that you don’t want to own your next car outright. If that’s the case, it’s worth considering personal leasing as this could reduce your monthly costs for new car finance.

On the other hand, if you definitely do want to own the car outright, stick to HP or a conditional sale. An optional balloon payment offers you maximum flexibility, but can affect the way your finance company calculates your car finance deal. While monthly payments tend to be lower for PCP, the final payment is harder to factor into your finances than a manageable monthly payment. In contrast, a hire purchase repayment plan factors in the full value of the car from the outset.

Extra charges for car finance

Finally, there are extra charges. If you want to avoid paying more for high mileage, a hire purchase agreement or personal loan may be the best route. That said, you can find PCP and leasing deals with higher mileage allowances to suit your requirements.

Crunching the Numbers

Whether you’re attracted to the freedom and flexibility of hire purchase or love the idea of continually upgrading to new vehicles with a PCH contract, it’s important to crunch your numbers before committing to a finance agreement.

Up-front affordability

Firstly, there’s your up-front affordability. Bear in mind that a larger deposit can increase the likelihood of approval and potentially help you secure a better interest rate. You may also be able to use your old car for part-exchange with some dealers, which works as a type of deposit or addition to the amount you’re paying.

Car finance terms

Your initial cash deposit isn’t the only factor to consider when asking can I afford to buy a car? Financial factors like your credit score and borrowing history can influence how much lenders are willing to offer and the fixed interest rate available. You’ll also need to factor in variables like your preferred loan term, your budget for monthly repayments and the car’s purchase fee. Our car finance calculator can give you a better idea of the amount you’ll be paying based on your loan amount, repayment term and credit rating.

Future plans

Try to think about any plans you have over the agreed period. Can you continue to pay for car finance for 36 months or do you plan to move house in the next couple of years, for example.

Insurance for your financed car

It’s also worth noting that insurance is not included in most car finance agreements. As the registered keeper, you will need to arrange insurance for the duration of your car finance agreement, and afterwards if you’re paying the full value of the car. Car insurance is a significant cost to take on and may require you to opt for a cheaper vehicle to make car finance work for your budget.

Choosing Between Car Finance Types (UK)

With a good understanding of the different types of car finance in the UK, you can choose the best options for your unique situation. It’s always good to have experts on your team, which is where My Car Credit comes in.

As a car finance broker, we compare deals from a large panel of trusted lenders, so you don’t have to spend hours shopping around. Apply for car finance today using our online form and let us find the right deal for you without all the legwork.

Armed with a wealth of knowledge and experience, plus access to one of the largest panels of lenders in the UK, we help you narrow down your search and secure suitable loan terms and interest rates.