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A personal loan is often the cheapest way to buy a car (unless you can get 0% finance via a dealer).
Our eligibility calculator shows you which loans are likely to accept you before applying.
If you're not sure, we've full info on how loans work, plus top tips for getting the cheapest rate.
Apart from personal loans, there are three main types...
Hire Purchase, where you pay monthly till you own the car.
Personal Contract Purchase (PCP), where you pay monthly, but then choose whether to buy the car or hand it back.
Leasing, where you rent the car and have no option to buy it.
Car finance usually refers to a specialised set of finance products that you can only get when buying a car – these are:
Car leasing (sometimes called Personal Contract Hire)
While you can also get a standard personal loan to buy a car, these finance products differ in that you won't own the car while you're paying them off, the finance company does. In fact, it's only with HP that you're guaranteed to own the car at the end of the deal.
You borrow money used to purchase or hire a new or second hand car. The three main choices of car finance are Hire Purchase (HP), Personal Contract Purchase (PCP) and car leasing.
You typically pay an initial deposit, followed by regular instalments (though sometimes you can arrange for no deposit or for the dealership to contribute to the deposit).
At the end of the contract, depending on the type of car finance, you will either own the car, have the opportunity to buy it, or will need to return it to the dealership.
Can you afford the monthly repayments? Budget carefully to ensure you can afford repayments, plus extras such as insurance.
Do you want to own the car? If you want to own the car, consider Hire Purchase (HP), Personal Contract Purchase (PCP) or a car loan.
Can you afford to pay a deposit? Most types of car finance (except a car loan) require a deposit, usually a percentage of the value of the car.
Did you buy a car, van or motorbike on Personal Contract Purchase or Hire Purchase (not leasing) before 28 January 2021? If so, you could be due £1,000s back.
The regulator, the Financial Conduct Authority (FCA), has launched a major investigation into hidden, unfair car finance commission. This could lead to billions of pounds of overcharged interest paid back to millions of people.
Which type of car finance to go for will depend on your personal circumstances and preferences – for instance, your financial situation and whether you want to hire a car or own one outright.
In the table below, we've listed the key factors to think about when choosing car finance.
Consider how much you're agreeing to pay and how long you'll have to pay for – you'll need to repay each month for many years, so make sure you can afford it.
Type of car finance | Typical length of agreement | Initial deposit usually required? | Who owns the car? | Mileage restrictions |
|---|---|---|---|---|
None – cash savings | N/A | N/A | You | No |
0% credit card | Up to 30 months | No | You (though you'll still need to repay the debt) | No |
Personal loan | Usually 1 to 7 years | No | You (though you'll still need to repay the debt) | No |
Personal Contract Purchase (PCP) | Usually 1 to 5 years | Yes | The finance company, unless an optional final balloon payment is made | Yes |
Hire Purchase (HP) | Usually 1 to 5 years | Yes | The finance company, until the final repayment is made, then you | No |
Leasing/Personal Contract Hire (PCH) | Usually 1 to 4 years | Yes | The finance company, at all times | Yes |
In short, yes – though not all providers will accept those with poorer creditworthiness, and those that do may charge higher interest (as they see you as a higher risk). Usually, applying to a lender is the only way to know if you'll be accepted for a loan. Yet that marks your credit file, and could affect your ability to get future credit. Our Eligibility Calculator uses a 'soft search' to calculate and show your chances of acceptance before applying.
The type of car finance you’ve taken out will dictate your options at the end of the contract.
At the end of a Personal Contract Purchase (PCP) deal, you must either return the car or make a one-off ‘balloon’ payment to purchase it.
With Hire Purchase (HP). you will own the car after the final payment has been made.
If you leased the car you must return it at the end of the term – there's no option to purchase it.
There are a couple of options to end a car finance agreement early...
Voluntary termination
Under the Consumer Credit Act 1974, you can legally terminate your contract if you've paid over 50% of the total cost of the loan, including interest and the final balloon payment. Car finance companies won't usually like this as they will often be taking back a car worth less than the remaining payments, so be aware that a voluntary termination of your contract might not be made easy for you. They may try to convince you to try other financing options, and it might take longer to process than you'd hope.
You'll still need to pay charges once the contract has been terminated. These include admin fees, such as a fee for collecting the vehicle, as well as charges for any damages or excessive mileage. A voluntary termination will show up on your credit file, although it shouldn't affect your credit score as much as clinging to a contract you can't afford and missing out on payments.
Also note that a voluntary termination differs from a voluntary surrender, in which less than 50% of the loan has been repaid. The finance company will take the car but you'll still have to pay the remaining balance of the contract.
Early repayment
The finance company only guarantees the value of the car at the end of the agreement. So if you want to sell your car two years into a four-year deal, you'll have to pay the difference between what it's worth and what you still owe.
Say, for example, at the point you want to repay, your car is worth £15,000 but your finance settlement figure is £17,000 – you'd have to pay the extra £2,000 to the dealer to clear your 'negative equity' before you can get out of the deal.
Some finance providers will charge you an extra fee on top to settle early, some won't. Check the fine print before you sign up if you think you'll want to do this.
There can be a variety of implications if you miss repayments...
Late payment fees. If you miss a car finance payment, most lenders will charge you a late payment fee. These fees can vary from one lender to another but are typically outlined in your loan agreement.
Negative impact on your credit score. Missing car finance payments will negatively impact your credit score. Each missed payment will be reported to credit agencies, making it more difficult to secure credit in future.
Potential vehicle repossession. If you continue to miss payments, your lender may initiate the repossession process. In the UK, lenders have the legal right to repossess the vehicle if you default on the loan. This can result in the loss of the car and still leave you responsible for the outstanding debt.
Legal action. In some cases, lenders may take legal action to recover the debt. This can lead to court judgments and further damage to your credit file.
Usually, yes, you can sell your car on Hire Purchase (HP) and Personal Contract Purchase (PCP) finance agreements, including when there is outstanding finance. You can never sell a car you’re leasing, however, because it’s never really yours.
To sell a financed car, you must request a settlement letter from your finance company, then sell your car to a dealer who will clear the outstanding balance directly with the car finance company, paying you the surplus (if any). Check your provider's policy first, as not all allow you to do this.
