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How does car finance work?

Simply put, car finance lets you spread the cost of buying a new car across regular monthly payments. There’s several different types of deals available which might be for you if:

You like the idea of changing to a new model every few years. PCP could be the option for you
You don’t quite have the funds to buy a car outright. Usually, HP or a loan can help you

You can use a car loan to borrow the money to buy your dream car in one lump sum. This way you’re spreading the cost of repayment over a number of years.

The deal types vary. The main options are that you borrow all of the money needed to buy the car, or you lease the car and choose to buy it outright at the end.

What are the different types of car finance?

We offer several types of car loan to suit different financial situations:

Hire Purchase (HP)

Hire purchase starts with a deposit to hire the car, usually around 10% of the car's value. After that you make monthly payments to the finance company until you've paid the car off in full.

Once you've made your final payment, you'll own the car.

Hire purchase deals usually lasts for 12 - 60 months and will often require a deposit at the start of the deal. Some deals have no limit on how many miles you can drive.

Car loans

Car loans are also sometimes known as a personal loan or an unsecured loan. A car loan lets you borrow a one-off lump sum which is paid back in monthly instalments. This allows you to buy a car outright and spread the repayment cost over the course of a few years. With a car loan, you’ll own the car and there’ll be no limits on how many miles you can drive.

Car finance car loan payment explanation

Personal contract purchase (PCP)

Personal contract purchase (PCP) is similar to hire purchase. PCP deals usually last for 36 – 60 months. They usually start with a deposit followed by monthly repayments. PCP monthly payments are typically lower than hire purchase or a car loan. This is because you’ll be paying off the depreciation of the car, not its full value.

When your repayments come to an end, you’ll have a couple of options:

If you’d like to own the car, you’ll have to pay a ‘balloon payment’ which will cover the cost of owning the car outright
Return the car to the finance company
Exchange the car for a new car on a fresh deal

Personal contract purchase PCP car finance payment explanation

What type of car finance is best for me?

Trying to decide what type of finance to choose is something you should think over carefully. There are a number of things you’ll need to take into account such as:

How much can you afford to pay back every month?
How much do you want to borrow?
How long do you want the repayments to last for?
Are you able to put down a deposit?
What does your credit score and history look like?
The terms and conditions that come with each finance option
Which car model and make you want
Whether you’re looking to own the car outright or switch to a fresh deal on a new car?

Take a look at our table to compare the finance options:

	Hire purchase	Personal Contract Purchase	Personal Loan
Requires initial deposit
Requires initial deposit	Usually requires deposit	Usually requires deposit
You own the car outright
You own the car outright
Car is yours at the end of the agreement
Car is yours at the end of the agreement		You can choose to own the car with a 'balloon payment	You'll own the car at the start of the agreement whilst paying off the loan
Fixed monthly payments
Fixed monthly payments
Optional balloon (final) payment
Optional balloon (final) payment
Excess mileage charges
Excess mileage charges
Secure against an asset (eg car)
Secure against an asset (eg car)

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What affects the price of car loan payments?

The cost of a car loan will depend on what type of finance option you choose as well as a few other things about your loan, such as:

Length of the loan, also known as the loan term, will usually play a large role in the overall cost of your car loan. A general rule of thumb is the longer the loan, the smaller your monthly payments will be. Just remember that the longer you borrow for means the more interest you pay in the long run.

The interest rate, also known as the APR, is used to work out how much money is added to the cost of your car loan. The APR amount is decided in-part by your credit rating. Your monthly repayments cover paying back the loan and the added interest. If you’ve had a history of debt problems or your credit score isn’t quite up to scratch, you may have to pay a higher interest rate. Having trouble getting your head around APR? Give our representative APR vs exact APR guide a read.

Your credit rating could also play a part in how much your deal could cost. If you'd like to read more, our guide on how to improve your credit rating might be able to help.

What is APR?

APR stands for annual percentage rate and is the total amount you’ll have to pay back to the lender, including any additional fees and charges. It’s included in your monthly repayments.

When you get a car loan quote, you’ll see 2 types of APR - guaranteed APR and representative APR

Guaranteed APR means the rate you see, for example 8%, will be the rate you get. The total amount repayable won’t change when you get your loan as it’s based on your specific details and takes everything into account.

Representative APR means the rate you see won’t necessarily be the rate you pay. The lender will need more details from you before being able to give you an exact rate.

How much does a car loan cost?

It depends on how much you borrow and for how long a period you pay back your loan.

Depending on your budget you may want to make your monthly payments lower. You can do this by paying your loan back over a longer period. But the total loan cost would increase as you’re paying that APR amount over a longer time.

Or equally to pay less APR overall, you could increase your monthly payments to pay off the loan faster.

You may also have to pay additional fees if you wanted to retain ownership of car.

Representative example: Borrowing £8,000 over 48 months with an APR of 24.4%, an annual interest rate of 24.4% (fixed), the amount payable would be £252.19 per month, with a total cost of credit of £4,105.22 and a total amount repayable of £12,105.22.

Credit subject to status. Actual finance offered will be dependant on further assessment of your affordability.

Illustration of how hire purchase finance works

How much can I borrow?

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What do I need to compare car loans with Confused.com?

To make finding the right car finance deal for you a little easier, have the following information to hand:

Your current UK address
A contact phone number and email address
Your annual income
Your general outgoings, things like regular bills or subscriptions

Can I apply for car finance with bad credit?

If your credit score and financial history could do with some improving, the good news is it’s still possible to get a car loan deal. However, you should expect to pay higher interest rates. Your credit score is considered by the lender and plays an important role when applying.

Having bad credit doesn’t mean you’re locked out of getting car finance, but it does mean the number of deals available to you are limited.

We compare up to 16 trusted car finance providers

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How we work

We’re a credit broker, not a lender. Our service makes it easy for you to compare a wide range of deals from different, trustworthy providers.

If you do decide to buy through us, we’ll get a fee from the provider you choose. Comparing with us costs you nothing and the fee we get from the provider in no way affects how we display our products.

Using our service won’t affect your credit rating as we only use soft searches. However, please keep in mind that if one of our providers makes you an offer, they may need to carry out more detailed checks. This is so they can delve a little bit deeper into your credit history to make sure you’re the right fit for them to lend to.

These checks plus any additional information they might ask for could affect the rate they initially offered you.

What our car finance expert says

Comparing deals and rates for finance can get confusing and what you see isn’t always what you get. By showing you the exact APR on deals rather than a representative APR, you’ll have a better idea of what you can expect to pay, making your budgeting that little bit easier.

Matthew Harwood

Car finance expert

Need more help?

Are there any mileage restrictions

Typically, you’ll see mileage restrictions on PCP deals. This is where you and your lender will agree a maximum amount of miles over the course of your PCP agreement. Depending on the lender, if you go over this amount, there may be an excess charge you’ll have to pay. To avoid any penalties, it’s always best to allow yourself some breathing room in your mileage allowance.

Can I get car finance?

The easiest way to get started is to fill out our form and get a quote.

Like most financial products, you’ll have to be over 18 to apply. Some lenders will have their own requirements so it’s best to get in contact with them if you have any questions before applying.

Can I repay my loan back early?

This will depend on the lender and the terms and conditions of your deal. Some lenders will allow you to make higher monthly repayments or allow you to pay back your loan in full, but you may be charged early repayment fees. If in doubt, it’s always best to speak to the lender first.