Types of Car Finance Explained
Rates from 8.9% APR. Representative Example: Borrow £12,000 over 5 years with a £0 deposit. Representative 19.5% APR fixed rate. Monthly payment: £304.38. Option to purchase fee £10 payable. Total cost of credit: £6,272.80. Total amount repayable: £18,272.80.
Car Finance 247 Limited is a credit broker, not a lender.
Buying a car is one of the few major purchases you'll make in your life, so it's important to do it right.
While the process of car shopping can be a thrilling experience, you also need to be sensible and realistic about what you can afford.
That's where car finance comes into the equation.
If you're on the lookout for a new car with a budget in mind, but you're not quite sure how to pay for it – you've certainly come to the right place.
Our guide below is sure to benefit you along your own personal journey to getting your next car – whichever route you choose to go down.
The term "car finance" applies to the process of paying for a vehicle over a set period of time, as opposed to buying it outright with a cash payment.
The most common types of car finance agreement are hire purchase (HP), personal contract purchase (PCP), lease purchase or personal loan, though other options are available also.
The payments you make over this period can depend on several factors - including the amount you're looking to borrow, the length of time you intend on keeping your car, and ultimately, what type of agreement you have.
With many options available, it's important to understand how they differ and why one option may be better suited to you than another.
There are multiple ways to pay for a car on finance.
Here we're going to breakdown some of the more common car finance types:
Hire purchase means that you're hiring the car from the lender until you've paid for it in full. The loan is secured against the vehicle itself, and you won't officially own it until the final payment has been made.
It is one of the most commonly used forms of car finance.
If you take out a hire purchase agreement, you can choose whether to pay a deposit up front - followed by regular monthly payments over an agreed period of time.
The size of deposit you put down will affect your monthly payments.
Once all agreed monthly payments have been made, the car will legally belong to you and the finance agreement will end. With a hire purchase agreement, you have the option to pay off the outstanding finance at any point by requesting a settlement figure from the lender.
Let's say you want to buy a car listed for £12,000 through a hire purchase agreement lasting 4 years (48 months).
You put down a deposit of £1,000 and get offered an
Your example breakdown might look a little something like this:
| Car value | £12,000 |
|---|---|
| Deposit | £1000 |
| Amount to finance | £11,000 |
| 20.9% | |
| Total repayable | £15,823.57 |
| Term | 48 months |
| Monthly repayment | £329.66 |
| Car owned at the end of agreement? | Yes |
“HP car finance is great for people looking for a straightforward way to own your car at the end of the agreement. Fixed monthly payments are perfect for those who prefer stability and want to spread the cost over time. Just remember, the car is all yours once you've made all the payments!”
A conditional sale (CS) agreement is the same as a Hire Purchase agreement, except that you will automatically own your car after the finance has been paid. Conditional sales may or may not include a balloon payment at the end of your agreement.
A personal contract purchase (PCP) agreement is similar to a hire purchase agreement, in the sense that you'll have the option to pay a deposit followed by fixed monthly repayments over a set period of time (typically 24-48 months).
However, at the end of the fixed term, you'll have the option to either hand the car back, use the equity as a deposit for your next vehicle, or obtain ownership of the vehicle by paying the Guaranteed Minimum Future Value (GMFV) (also known as a “balloon payment”).
There will be a clause in your agreement which states what the maximum annual mileage on the car can be. Should you exceed the maximum annual mileage, or the vehicle is subject to damage that is not classed as general wear and tear, there may be charges set by the lender.
You can find further information around charges in your initial finance agreement.
Let's imagine you sign up for a 5-year (60 months) PCP deal on the same car listed at £12,000.
When you discuss a PCP agreement, one of the first things you'll need to declare is your annual mileage.
Let's say you agree to 8,000 miles as your annual limit.
The next thing is the deposit. The more money you put down – the less you'll pay back on a monthly basis.
In this case, you choose not to put down a deposit.
The lender is likely to have already calculated the GMFV of the car at this point. This is what they believe the car's value will be at the end of the agreement.
If the calculated GMFV is £4,825, and you decide to keep the car at the end of the agreement, the balloon payment will also be £4,825.
Here's what your breakdown could look like:
| Car value | £12,000 |
|---|---|
| Deposit | £0 |
| Amount to finance | £12,000 |
| 19.8% | |
| Term | 60 months |
| Monthly repayment | £258.85 |
| Annual mileage | 8,000 |
| Total amount repayable (with balloon payment) | £20,098.15 |
| Total amount repayable (without balloon payment) | £15,273.15 |
At the end of the contract, however long that may be – you usually have 3 choices to make.
Every car finance agreement has a built-in clause that legally gives you the right to terminate the contract (Voluntary Termination) once you've paid off half of the total repayable amount.
However, the mechanics of PCP make this very difficult. When you factor in the deposit, lower monthly repayments and the large balloon payment attached to the agreement – the likelihood is that you won't pay back half of the loan until you're deep into the contract.
If you hit financial trouble earlier in the contract, things can get complicated – so be sure to factor this into your decision.
Whilst we don’t currently offer a personal loan option, here is some information which may be useful. A personal loan (also known as an unsecured loan) enables you to borrow an amount of money over a fixed amount of time.
If you choose to take out a personal loan to buy a car, you will own the car from the time that the dealer receives the money for it.
This loan is not secured against the vehicle itself (unlike a PCP or hire purchase agreement), meaning that you can sell the car at any time without needing permission from your finance company beforehand.
“There’s more than one way to pay for your next car – let us help you explore your options so that you get a car loan that’s right for you.”
For illustration purposes only. The rate and payment you may be offered will be based on your individual circumstances.
There are a few additional things to think about when it comes to car finance options.
Some you'll perhaps already be familiar with and some are more relevant to certain types of car finance than others – however it's useful to be aware of these things if you're currently in the mind-set of exploring car finance.
You don't necessarily need to put a lump sum down to secure car finance.
Provided you meet the necessary eligibility criteria – you may be able to try no deposit car finance.
No deposit car loans enable you to get a new car without having to make any payments in advance (although you might need to pay a small reservation fee in some cases).
Again, you don't need to pay a cash deposit.
You can part-exchange your current car towards the deposit, or – you could part-exchange a car as part of the transaction itself.
Part-exchanging is also an effective way to offload your old car. It takes the admin and time out of facilitating the sale yourself.
When it comes to deposits, if you don't have the cash, or a car to part-exchange – then it might be worth exploring no deposit finance as an option.
The most popular type of car finance taken out by our customers is hire purchase (HP) – although we do provide other finance options.
With access to a large panel of lenders, we're able to help customers secure a car finance option to suit them.
If you have an idea of what sort of budget you're working with – our car finance calculator is a quick and easy tool that helps give you an idea of how much you'll be able to borrow.
Upon making an application for finance with us, we work hard to find the best finance option available for you.
If approved, we'll then provide you with a no obligation quote and discuss the terms of the finance approval in detail. When you're happy, it's time to start looking for your car!
So whether your credit history is poor or excellent we'll do our utmost to find you a suitable finance option and get you in your new car in no time at all.
If you've got a question or want to know more about how Car Finance 247 works, contact our customer services team who can explain everything you need to know!
We look to find the best rate from our panel of lenders and will offer you the best deal that you’re eligible for. We will be paid a commission for providing our services and this commission may be a fixed amount or a percentage of the amount borrowed. The interest rate you pay is directly linked to the amount you are borrowing and your individual credit status.
 2.png)
 (2).png)
