6 Types of Car Finance in the UK

Hire purchase to own a car outright

Hire purchase (HP) is one of the simplest UK car finance types. It allows you to spread the cost of the vehicle over a set period of time, with repayments usually made monthly. At the end of the hire purchase agreement, you’ll own the car outright, with nothing more to pay. Deposits aren’t always required, though they can help reduce your interest rate and monthly repayments.

To calculate the total cost of your hire purchase agreement, simply take the price of the car, minus the deposit and add interest. You may also be liable for administration and transfer rights fees at the end of the loan, which are worth factoring in. Most hire purchase agreements span for between three to five years, although this can vary. Monthly payments are fixed, making it easy to budget and plan around your loan.

Conditional sale car finance agreement

Similar to a HP agreement, conditional sale loans are a great option if you want to own your new car outright at the end of the contract. Fixed monthly payments are a little higher though there are no additional fees at the end of the agreement. Deposits are usually 10% of the car’s value and repayment terms can be anywhere from two to six years, allowing for plenty of flexibility for a brand new car.

Personal contract purchase

Personal contract purchase (PCP) is one of the most popular types of UK car finance options and for good reason. Fixed monthly repayments are lower than HP loans, which allows you to consider newer, higher spec vehicles without blowing the budget. You may need to make an initial deposit worth around 10% of the car’s value, and then you’ll continue to make repayments over the lifetime of the loan, usually between two and four years.

When you’ve made your final instalment, you have the option to make a ‘balloon payment’ to gain ownership of the vehicle. The balloon payment is a final payment which covers the minimum future value of the car at the end of the PCP agreement. Alternatively, you can opt out of the large, lump sum payment and swap the car for a new model, making PCP loans popular with motorists who like to change cars for the latest bells and whistles. 

Most PCP loans require you to estimate your expected annual mileage, which is used to calculate Guaranteed Future Value (GFV). This figure predicts the value of the car at the end of the loan based on maximum annual mileage. Without mileage limits, it’s hard to predict a car’s value as the same car would be worth a significantly different amount if it has been driven 50,000 miles or 15,000 miles, for example. As such, if you go over your pre-agreed mileage limit you may incur penalties as this reduces the guaranteed minimum future value.

Personal loan

Few major purchases cost as much as a car, so it’s no surprise that loans are another option to cover your payment to a car dealer or private seller. Personal loans see you borrow the total amount needed to purchase a car, then pay back the amount in monthly instalments. You’ll also have to pay interest on the amount borrowed, based on an annual percentage rate.

You’ll own the vehicle outright, which makes a personal loan appealing to motorists who want complete freedom when it comes to mileage, wear and tear, customisation and other liberties. You’re also free to sell the car at any time with a personal loan. Borrowers with good credit profiles can generally unlock the best interest rates and personal loan terms.

Guarantor loan

For borrowers with bad credit, guarantor loans are one of the most appealing car finance types in the UK. A third party, usually a family member, agrees to ‘guarantee’ the loan with a finance company or car dealers and step up if you can’t make repayments. It’s a big responsibility for both you and the guarantor and so shouldn’t be entered into lightly.

Personal Contract Hire (PCH)

Also known as leasing, personal contract hire allows you to rent a vehicle for the lifetime of the agreement. Contracts start with an initial cash deposit followed by low monthly payments to cover the cost of the lease. The value of your monthly payments is determined using your expected annual mileage and the length of your lease. This is because both variables play a big role in the value of the vehicle at the end of your contract. 

At the end of the agreement, you return the car to the dealer, with no option to purchase it outright. Most people choose to start a new PCH contract, which gets you the keys to a brand new vehicle. If you love fresh leather seats, cutting-edge technology and that sought-after new car smell, you’ll love PCH loans. You’ll also sidestep depreciation, as well as enjoy perks like breakdown cover, waived road tax and complete coverage under the manufacturer’s warranty. For legions of motorists, the hassle-free nature of PCH makes it one of the most desirable UK car finance types.

What’s the best type of car finance for you?

When you’re choosing between different car finance options, there are a few things to bear in mind. Firstly, your credit rating. If you don’t have a good credit score, you may struggle to get approved for personal loans.

Instead of an unsecured loan, drivers with a poor credit history can opt for PCP finance, hire purchase and conditional sale car finance deals. These are classed as secured loans because the vehicle is an asset for the finance company. In other words, it can be repossessed in exchange for outstanding finance.

Another big consideration is the balloon payment. You may know already that you don’t want to own your next car outright. If that’s the case, it’s worth considering personal leasing as this could reduce your monthly costs for new car finance.

On the other hand, if you definitely do want to own the car outright, stick to HP or a conditional sale. An optional balloon payment offers you maximum flexibility, but can affect the way your finance company calculates your car finance deal. While monthly payments tend to be lower for PCP, the final payment is harder to factor into your finances than a manageable monthly payment.

Crunching the numbers

Whether you’re attracted to the freedom and flexibility of hire purchase or love the idea of continually upgrading to new vehicles with a PCH contract, it’s important to crunch your numbers before committing to a finance agreement.

Your initial cash deposit isn’t the only factor to consider when asking can I afford to buy a car? Financial factors like your credit score and borrowing history can influence how much lenders are willing to offer and the fixed interest rate available. You’ll also need to factor in variables like your preferred loan term, your budget for monthly repayments and the car’s purchase price.

Choosing between car finance types (UK)

With a good understanding of the different types of car finance in the UK, you can choose the best options for your unique situation. It’s always good to have experts on your team, which is where My Car Credit comes in. Armed with a wealth of knowledge and experience, plus access to one of the largest panels of lenders in the UK, we help you narrow down your search and secure the best loan terms and interest rates.

Connect with us via email or give us a call on 01246 458 810 to chat to a team member about UK car finance types.