What are the different types of car finance?
There are several ways to finance your car with credit. Here are the main ones:
Personal Loan
A personal loan could give you enough money to buy a car outright. You’ll then pay the loan back over a set length of time, usually at a fixed interest rate.
One advantage of a personal loan is that it’s unsecured, meaning you don’t have to use an asset (such as your car or house) as security. Security is something the lender can forcibly sell to get their money back if you can’t repay them. An unsecured loan means less risk for you, but more risk for the lender, so you may need a good credit score to get approved.
It’s sometimes easier to get approval or a better rate by applying for a loan that’s secured against your car. However, you may lose the car if you can’t keep up with repayments.
You can see your chances of approval for personal loans when you compare loans with us. It’s free and it won’t affect your credit score. Just remember, we’re a credit broker, not a lender† – that means we don’t provide credit, but we can help you find a deal that fits.
Hire Purchase
With a car hire purchase agreement, you’ll usually put down a deposit to take the car away. You’ll then make monthly payments towards the cost of the car, but you won’t actually own it (or be able to privately sell it) until the final payment has been paid – along with an extra ‘option to purchase’ fee, usually around £100-£200. This is quite different from buying a car with a personal loan, for example, where you’d buy the car outright at the start of your repayment plan.
What’s more, with a hire purchase agreement your debt is secured against the car – so if you stop making your payments, the company may take the car off you to recover the money you still owe.
Note that if you end a hire purchase agreement early, you may have to pay a penalty fee.
Find out more about hire purchase
0% Finance
Some cars come with a finance option, whereby you’d put down a deposit and pay the remainder in monthly instalments. You may need a large deposit for this option, and your monthly payments may be quite high. But the upside is that you shouldn’t have to pay any interest on the debt, as long as you stick to the term of the agreement and make all your payments on time and in full.
Leasing
When you get a car lease, you don’t ever actually own the vehicle, you just make regular payments for using it. How much you’re charged is usually based on the value of the car, how long you’ll use it for, and an agreed mileage allowance.
You may pay less each month than if you were paying off a car bought on credit, but there may be extra costs involved. For example, if the car’s a bit scuffed up at the end of the lease, you may be charged an ‘excessive wear and tear’ fee.
You’ll probably need fully comprehensive car insurance, or any damage to the vehicle will need to be paid for out of your own pocket when you return it. Some companies may insist you also take out gap insurance, which gives them more protection against damage or theft.
Find out more about leasing
Personal Contract Purchase (PCP)
PCP loans are one of the most common forms of new car finance, but they can also be one of the most complex. With PCP, you won’t buy the car outright. Instead, you'll put down a non-refundable deposit towards the vehicle’s price, and borrow the rest. You’ll then make monthly payments to cover interest and the cost of depreciation (i.e. what the car loses in value while you have it).
At the end of the contract, you’ll usually have a few options:
- Buy the car outright – you’ll need to pay the value of the car (usually agreed at the start of your contract) minus your deposit. There may also be an additional fee.
- Trading it in for a replacement with a new PCP contract.
- Returning it – there won’t be anything more to pay, as long as you’ve kept to the terms and the car isn’t damaged.
PCP loans are often used by people who like to change their car regularly. They carry the advantage of being quite flexible, and they usually offer low monthly payments since you’re not paying off the car. However, the interest rates are often higher than other types of loans. You should also read the small print very carefully – in particular, watch out for penalty charges for exceeding the mileage allowance, and for damage to the car while you’re using it.
Note that to get approved for a PCP agreement, you’ll usually need a good credit history, especially for 0% or low APR deals.
Find out more about personal contract purchase
0% purchase credit card
Buying your car outright on a 0% purchase credit card could be another option, as many car dealers now accept credit cards.
Generally, you’ll need a good credit score to get a high limit on a purchase card. So this option may be most suitable for people with good credit, or those who’re looking for a relatively cheap car.
A credit card can allow you greater flexibility – you can decide how much to pay off each month, as long as you meet the minimum repayment. And with a 0% purchase card, you won’t pay interest on your purchase for a set period of time.
Just make sure you meet the minimum monthly payments on time and in full, otherwise you may lose the promotional rate. Also, it’s a good idea to pay off the debt before the promotional period ends, to avoid paying interest on the lender’s standard rate.
