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What Types of Car Finance are Available in the UK?

Buying a car is a significant investment, and not everyone can pay the full amount upfront. Car financing is an excellent way to get your dream car without breaking the bank. The UK market offers several car finance options, each with its pros and cons. In this article, we will take a closer look at the types of car finance available in the UK and help you decide which one is best for you.

  • Introduction
  • Hire Purchase (HP)
  • Personal Contract Purchase (PCP)
  • Personal Loans
  • Credit Cards
  • Leasing
  • Dealer Finance

The UK car finance market is worth billions of pounds, and there is a vast range of options available to consumers. From Hire Purchase to Personal Contract Purchase, each finance option has its advantages and disadvantages. Before choosing a car finance option, it is essential to consider your financial situation, preferences, and driving habits.

Personal Loans

Personal loans are another option for car finance in the UK. With this option, you borrow a lump sum from a bank or other lender and use it to buy the car outright. You then repay the loan in fixed monthly instalments over a set period. Personal loans have a fixed interest rate, and you can usually borrow more money than with other car finance options. However, personal loans are unsecured, so you will need a good credit score to be approved.

Leasing

Car leasing is becoming an increasingly popular option in the UK. With leasing, you pay a monthly fee to use the car for a set period (usually between two and four years). At the end of the agreement, you return the car to the dealership. Leasing agreements often include maintenance and servicing, which can be an advantage. However, you never own the car outright, and there are usually mileage restrictions and other fees to consider.

Dealer Finance

Dealer finance, also known as dealership finance, is a type of car finance offered by car dealerships. This type of finance allows you to purchase a car from a dealership and spread the cost of the car over a set period, with fixed monthly payments.

Dealer finance can come in a variety of forms, including Hire Purchase (HP), Personal Contract Purchase (PCP), and Personal Contract Hire (PCH). The type of finance offered will depend on the dealership and the lender they are partnered with.

One of the main advantages of dealer finance is convenience. When purchasing a car from a dealership, you can often arrange finance on-site and drive away in the car on the same day. This can be a faster and more streamlined process than applying for finance with a bank or other lender.

HP Finance

Hire Purchase (HP) is a type of car finance agreement available in the UK. It is a popular option for those who want to buy a car but do not have the funds to pay for it outright. With HP, you make fixed monthly payments over a set period, usually between 12 and 60 months, until you have paid off the entire value of the car. Once you have made all the payments, you own the car outright.

HP agreements usually require a deposit, which can range from a few hundred to a few thousand pounds, depending on the value of the car. The deposit reduces the amount you need to borrow and can also reduce your monthly payments. The interest rate on HP agreements can vary depending on the lender and your credit score, but it is usually fixed for the duration of the agreement.

One of the advantages of HP agreements is that they are easy to understand. You know exactly how much you need to pay each month, and the total cost of the car is spread out over a set period. This can make it easier to budget and plan your finances. HP agreements are also flexible, as you can usually choose the length of the agreement and the size of the deposit.

However, there are also some disadvantages to HP agreements. The monthly payments can be higher than with other car finance options, as you are paying off the entire value of the car. You also do not own the car outright until you have made all the payments, which means you cannot sell or modify the car until then. If you miss a payment, the lender can repossess the car, which can have a negative impact on your credit score.

PCP Finance

Personal Contract Purchase (PCP) is another type of car finance agreement available in the UK. It is similar to HP in that you make fixed monthly payments over a set period, but with a PCP agreement, the payments only cover the depreciation of the car, rather than the entire value of the car.

At the beginning of a PCP agreement, you agree on a deposit and a monthly payment amount. The lender then calculates the Guaranteed Minimum Future Value (GMFV) of the car, which is the estimated value of the car at the end of the agreement. This value is then subtracted from the price of the car to determine how much you will pay in monthly payments.

At the end of the agreement, you have three options: you can hand the car back to the lender, pay the balloon payment and keep the car, or trade the car in and use the equity as a deposit for a new PCP agreement.

One of the advantages of PCP agreements is that the monthly payments can be lower than with HP, as you are only paying for the depreciation of the car. The balloon payment also gives you a guaranteed future value for the car, which can be helpful when planning your finances. PCP agreements are also flexible, as you can choose the length of the agreement, the size of the deposit, and the annual mileage limit.

However, there are also some disadvantages to PCP agreements. If you exceed the annual mileage limit, you may have to pay an excess mileage charge at the end of the agreement. If the car is damaged beyond normal wear and tear, you may also have to pay for repairs or damage. If you want to keep the car at the end of the agreement, you will need to pay the GMFV, which can be a large sum of money.

In summary, PCP is a popular option for car finance in the UK. It is a flexible way to spread the cost of a car over a set period, with lower monthly payments than HP. However, it is important to consider the GMFV, annual mileage limit, and overall cost of the agreement before choosing PCP as your car finance option.

Personal Contract Hire

Personal Contract Hire (PCH) finance, also known as car leasing, is a type of car finance that allows you to hire a car for a fixed period of time, typically 2-4 years, with fixed monthly payments. At the end of the agreement, you simply return the car to the leasing company.

With PCH finance, you do not own the car and are not required to make a final payment to purchase the car at the end of the agreement. Instead, you can choose to enter into a new PCH agreement for a different car or simply return the car to the leasing company and walk away.

PCH finance is a popular option for individuals and businesses who want to drive a new car every few years without the hassle of selling or trading in their old car. PCH agreements typically include a fixed mileage limit, and exceeding this limit can result in additional fees.

One of the main advantages of PCH finance is that it can be a cost-effective way of driving a new car. Monthly payments are often lower than other types of car finance, such as Hire Purchase (HP) or Personal Contract Purchase (PCP), because you are essentially only paying for the depreciation of the car over the period of the agreement.

Another advantage of PCH finance is that it can offer flexibility. You can choose the length of the agreement, the mileage limit, and other options such as maintenance and servicing packages.

FAQs

What is the difference between Hire Purchase and Personal Contract Purchase?

With Hire Purchase, you pay off the entire value of the car over a set period and own the car outright at the end of the agreement. With Personal Contract Purchase, you only pay off the depreciation of the car and have three options at the end of the agreement.

Is leasing a car a good option?

Leasing can be a good option if you want to drive a new car every few years and don't want to worry about maintenance and servicing. However, you never own the car outright, and there are usually mileage restrictions and other fees to consider.

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Rainworth (Yorkshire) Limited is an Appointed Representative of Automotive Compliance Ltd, who is authorised and regulated by the Financial Conduct Authority (FCA No 651618). Automotive Compliance Ltd’s permissions as a Principal Firm allows Rainworth (Yorkshire) Limited to act as a credit broker, not as a lender, for the introduction to a limited number of lenders and to act as an agent on behalf of the insurer for insurance distribution activities only.

 

We can introduce you to a selected panel of lenders, which includes manufacturer lenders linked directly to the franchises that we represent. An introduction to a lender does not amount to independent financial advice and we act as their agent for this introduction. Our approach is to introduce you first to the manufacturer lender linked directly to the particular franchise you are purchasing your vehicle from, who are usually able to offer the best available package for you, taking into account both interest rates and other contributions. If they are unable to make you an offer of finance, we then seek to introduce you to whichever of the other lenders on our panel is able to make the next best offer of finance for you. Our aim is to secure the best deal you are eligible for from our panel of lenders. Lenders may pay a fixed commission to us for introducing you to them, calculated by reference to the vehicle model or amount you borrow. Different lenders may pay different commissions for such introductions, and manufacturer lenders linked directly to the franchises that we represent may also provide preferential rates to us for the funding of our vehicle stock and also provide financial support for our training and marketing. But any such amounts they and other lenders pay us will not affect the amounts you pay under your finance agreement, all of which are set by the lender concerned. If you ask us what the amount of commission is, we will tell you in good time before the Finance agreement is executed. All finance applications are subject to status, terms and conditions apply, UK residents only, 18’s or over. Guarantees may be required.