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Car Finance Options Explained

It’s important to find the right car finance option for you. We’re here to explain the differences between them – so you can drive away with the car you want.

26 May 2023Helen Tippell 5 min read
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The different types of car finance

There are lots of different car finance options out there – so let’s look at what’s available.

With hire purchase (HP), the finance company (a bank, building society or other lender, for example) owns the car until you make the final payment. They'll pay the car dealership directly and you'll make repayments to the finance company. They can sometimes offer lower interest rates because the car acts as security. They'll also be able to help you if something is wrong with the car. Here’s a quick summary to explain:

  • The agreement can be up to 5 years long
  • Most of our lenders won’t ask for a deposit
  • You’ll pay fixed monthly amounts and there’s no lump sum at the end
  • Your mileage won’t be restricted
  • The finance company owns the car until you make the final payment

If you choose to take out an unsecured personal loan, you'll own the car straight away. The finance company will give you the money to pay the dealership. Here’s a summary of what this means:

  • The agreement can be up to 8 years long
  • You’ll pay fixed monthly amounts – you won’t need a deposit
  • There’s no lump sum to pay at the end
  • Your mileage won’t be restricted
  • You’ll own the car straight away

You might hear about a personal contract purchase – or PCP – when speaking to people about getting a car on finance. Here’s what it could mean for you:

  • The agreement can be up to 5 years long
  • You’d pay a deposit and make fixed monthly payments
  • Your mileage would be restricted
  • The finance company own the car until you make the final balloon payment

A balloon payment is the final lump sum you’d need to pay if you want to keep the car. You might also hear it called an ‘optional final payment’ – because it’s up to you if you want to keep the car. With PCP, you’ll usually have three choices:

  1. Make the balloon payment – or optional final payment – and keep the car
  2. Part exchange the car and start a new contract
  3. Return the car to your lender

A guarantor loan works in a similar way to an unsecured personal loan. Except someone else (usually a friend or relative) agrees to make the repayments if you can’t. They’re then known as the loan guarantor. This can be an option for young drivers, who haven’t built their credit score yet, or for someone with a low or bad credit score. The lenders perform checks to make sure the guarantor can repay the loan on your behalf (as a last resort).

If you’ve been searching for a car, you might have seen exciting offers from the dealership offering 0% finance options. These offers mean that you don’t have to pay an interest rate – whereas, with most other loan types, you will. Because dealerships and finance companies make a profit through the interest they charge you, these types of offers are usually only for brand new cars (because they’re more expensive than used ones). And, you’d likely need to have a good credit history. If this is the option for you, it’s important to check if there are any extra fees or charges.

It’s not very common to take out a credit card to buy a car, but here’s an overview of what that means. Because credit cards have limits and interest rates, buying a car on one is a big decision. If you can get a 0% interest credit card, you might find that making the payments is manageable. Things to look out for are card handling fees, credit limits and if the dealership accepts credit cards.

Leasing a car might sound like PCP but there are a few differences. You’ll still need to pay a deposit and make monthly repayments, but you should think of leasing like renting. You rent your car for a fixed period of time and then return the car at the end of that time.

As with most loans, having a good credit score is a great step in the right direction on the road to getting accepted. You can keep an eye on your score and report, for free, by signing up to ClearScore. We want you to be confident about your choices which is why we’ll give you easy tips to help improve your credit score.

There are some other factors to think about when you start looking for car finance. For example, if your current income and debt history are suited to the lender. You should always make sure you can make repayments so it’s important to discuss your options either directly with the dealership or with your lender.

You won’t be able to take out a car finance agreement until you’re 18, but you can take steps to make sure you’re in the best possible position when you do turn 18. The best way to do that is to join the electoral register.

When you turn 18, you’ll have access to car finance offers if you have a job and a good credit history. This might not be easy at 18, so it’s a good idea to keep an eye on your score and learn how to build it.

You’re more likely to have better options between the ages of 19 and 21 because you’ll have a longer credit history for the lender to check. Explore the different car finance options out there and see which one works for you.

Buying a new car is exciting but it’s also a big commitment. Before you make any decisions, think about the short and long-term impacts.

For example, you could ask yourself what your budget is and if you can afford to make the monthly repayments. Lots of car finance offers are spread across a few years, which means your monthly expenses could be impacted for quite some time.

You should also think about the type of car you’d prefer and how this impacts the offers you’re seeing.

And don’t forget to check your credit score before you apply. Any representative rates you see during your search aren’t necessarily the rates you’ll get. When the lenders perform a hard search on your credit history, your score will be impacted, and you might not be accepted if your score is low or bad. So you might need to wait a while before reapplying.

Generally, the better your credit score, the better the offers you’ll unlock. You could find that improving your score changes the offers you’re seeing, giving you more control over your financial wellbeing.

We want you to feel confident about your choices so you can drive away with the car you really want. That’s why we’ll show you hire purchase and unsecured personal loans that are tailored to your credit score – so you can explore your options before you choose your car. Join ClearScore to see what your personalised car finance offers could look like.

Next step: Start comparing car finance options today.

Helen Tippell Image

Written by Helen Tippell

Digital Copywriter

Helen's our resident Digital Copywriter. She makes personal finance easier to understand so you can be confident about your credit choices.