Car Finance FAQs: Everything You’ve Always Wanted to Ask
Whether you're new to car finance or looking to better understand your current options, we’re here to help. We've answered some of the most common questions about all things car finance to ensure you’re confident and making informed decisions at every stage.
Car finance is subject to status and affordability checks. Terms and conditions apply.
Understanding car finance
What is car finance?
Car finance is a way to buy a car by spreading the cost over a period of time. Rather than paying the full amount upfront, you pay it back in more manageable monthly payments, plus interest.
The interest rate on car finance is important to consider, as it affects the total amount you’ll pay. The higher the interest rate, the more you'll pay in the long run. Your credit score, the type of finance agreement, and the length of the term all influence the interest rate you're offered.
There are different types of car finance available; some of them let you keep the car at the end, some don’t. The right choice for you will depend on how much you want to pay monthly, overall, and whether or not you want to keep the car.
Note: Car finance is a regulated financial product. Before committing to an agreement, it’s important to understand the terms and conditions, including any potential fees and charges.
What are the different types of car finance?
The main types of car finance are:
- Personal Contract Purchase (PCP): Often with lower monthly payments, you don't own the car unless you make a final "balloon" payment. You also have mileage limits to consider during the term of the agreement. If you return the car and it has exceeded the agreed mileage limit or has excessive wear and tear, additional charges may apply.
- Hire Purchase (HP): You might pay a deposit and then make fixed monthly payments over an agreed period. Once you’ve made all the payments, the car is yours. You won’t own the car until the final payment is made. There are no mileage restrictions with this option.
- Personal Contract Hire (PCH): This is also known as leasing. It’s essentially renting a car for a set period; there's no option to buy the car. You must return the car at the end of the lease, and excess mileage charges may apply.
What’s the difference between HP and PCP?
HP and PCP are both popular options for car finance but work slightly differently.
- Ownership – With HP, once you’ve made the final payment, the car is yours. With PCP, you have three options: hand the car back, trade it in or keep it by paying the “balloon” payment.
- Price – HP monthly payments are typically more expensive because you’re paying for the full value of the car. PCP has lower monthly payments because you’re only covering the car’s depreciation, not its full value. But, there’s the large final balloon payment at the end if you want to keep the car, which may make it more expensive overall.
- Mileage – PCP comes with mileage limits, and going over them often means extra charges, whereas HP has no restrictions since you will own it at the end.
If you like to switch cars every few years or have the flexibility at the end to decide what you want to do, PCP might be a better option. But if you know you want to keep your car long-term, HP could be the cheaper choice overall.
You should carefully consider which finance option suits your financial situation and long-term needs before entering into an agreement.
Eligibility and requirements
Can I get car finance with bad credit?
Yes you could, but it may be more difficult. Lenders may charge higher interest rates than if you have a good credit score or require a guarantor.
At Car Finance 247, we work with specialist lenders who offer bad credit car finance deals and could be able to help. They look at more than just your credit score when assessing your suitability, factoring in things like your current salary and your job too. Just bear in mind that you may have to pay a higher rate of interest.
Note: Car finance is subject to status and approval is not guaranteed, and affordability checks will be carried out.
Understanding payments
What happens if I miss a car finance payment?
If you miss a car finance payment, you’ll likely have to pay a late payment fee. If you still don’t pay, the lender could take legal action and may even repossess the car. Missing payments can have a seriously negative impact on your credit score, which could make it harder to get credit in the future.
If you’re struggling to make payments, contact your lender as soon as possible. They may be able to offer support options, such as adjusting your repayment plan. Visit our guide on missing car finance payments for more information.
Can I pay off my car finance early?
Yes, you could pay off your car finance early, but it’s important to check with your lender first, as early settlement fees may apply. Some lenders charge fees to cover the interest they lose if you settle the loan early.
You’ll need to request a settlement figure from your lender to understand any fees or outstanding costs before making your decision.
Damage & returning the car
What happens if my car is written off while on finance?
If your car is written off due to an accident or damage, you must let your lender know straight away. Your car insurance should cover the cost of the car. But, if the insurance payout is less than the amount you owe on the finance agreement, you could be left with the difference to pay yourself.
Gap insurance could help cover the shortfall between your car’s insurance payout and the outstanding finance balance. Check whether your policy includes gap insurance or if you need to buy it separately. Visit our guide what happens if you crash a car on finance for more information.
Can I hand my car back before the end of the finance agreement?
If you want to end your agreement early and give your car back, you might be able to opt for voluntary termination. But, you’re only eligible if you’ve paid at least 50% of the total amount due, including any interest and fees. The car must also be in good condition, and you may still be charged for any excess wear and tear or mileage over the agreed limits.
Note: Voluntary termination is a legal right under the Consumer Credit Act but comes with conditions. Always check your agreement before proceeding.
Disclaimer: Car finance is subject to status, affordability checks, and lender terms. Late or missed payments may negatively impact your credit rating and could result in your vehicle being repossessed. This article does not constitute financial advice. Always consider your personal circumstances and, if necessary, seek independent financial guidance before taking out a finance agreement.