Car Finance: A Complete Guide

At My Car Credit, we understand that the process of finding car finance can seem overwhelming. From the new jargon and technical terms you’ll come across to the multiple kinds of car finance agreements available, it’s easy to feel like car finance might not be the simplest or easiest option for you. 

But that couldn’t be further from the truth – that’s why we’ve put together this comprehensive car finance guide. 

We’ll break down everything from types of car finance to key terms and explain the process of applying for car finance, putting you in the driver’s seat as quickly as possible. Here’s everything you need to know in our car finance guide…

What is car finance?

In simple terms, car finance is a type of agreement where you pay for a car over time. It allows you to drive a car without having to pay a large upfront payment for it.

Your finance lender pays for the car upfront. As such, the lender is the car’s legal owner until you’ve paid the vehicle off in full through a series of affordable monthly repayments, plus any interest and charges. Whilst you’re repaying these monthly installments, you’ll have full use of the car.

Different kinds of car finance agreements will have variable repayment schedules and terms. Factors including the length of your agreement, an initial deposit, interest rate, credit score, car type and your end-of-term options will all differ depending on the car finance agreement you have.

The right car finance agreement for you will depend on your unique needs and circumstances. 

Car finance types explained

Below, we break down the main types of car finance available through My Car Credit:

Hire purchase (HP)

Hire purchase (HP) is one of the most popular and simplest types of car finance agreements. 

With HP, you’ll benefit from fixed monthly payments and interest rates for easy budgeting. An initial deposit is optional, and you won’t face any final balloon payment. At the end of your term, you’ll own the vehicle outright, and you won’t face any mileage limits or fines for excess wear and tear. 

So, HP finance is ideal for drivers who want to own their car once the finance agreement and any outstanding interest are paid in full.

Pros: 

• Regular, fixed repayments help with accurate, predictable budgeting.
• Great for people with a less-than-perfect credit score looking to own their car outright.

Cons:

• Monthly payments for HP are normally higher than other car finance agreements.
• The lender owns the car until finance is fully cleared – so you can’t make any vehicular changes.

Personal contract purchase (PCP)

Personal contract purchase (PCP) is another popular car finance agreement. Compared to HP, PCP finance has lower monthly repayments. Plus, ownership of the vehicle at the end of the finance term is optional depending on whether you make a final balloon payment.

Payments for PCP are lower overall because they’re based on the lender’s calculation of guaranteed future value (GFV). This is a forecast of the car’s value at the end of the finance term, based on your initial estimate of your yearly mileage.

PCP is a popular finance agreement for those seeking flexibility at the end of the repayment term as well as for drivers who like to upgrade their vehicle frequently.

Pros:

• Great for those who want to regularly change the car they drive, or like to drive newer models.
• Lower repayment fees than other car finance options.
• Flexibility of options at the end of your agreement.

Cons:

• More expensive to buy the car at the end of your agreement.
• You’ll need to budget for the final balloon payment if you want to own the car at the end of the term.
• If you go over your agreed mileage, the financial penalties can be significant.

Personal contract hire (PCH) or leasing

With personal contract hire (PCH), you’re benefiting from a long-term rental. That’s why PCH is also known as leasing, as there’s no option to own the car at the end of your agreement’s term.

You’ll face mileage limits with a PCH agreement. The higher your mileage, the higher your monthly repayment, as higher mileage means more vehicle depreciation.

PCH can be a great option for motorists who want to regularly drive newer cars without ownership.

Pros:

• You don’t front the cost of the car’s depreciation.
• No option of final ownership, so you can update your car more regularly.

Cons:

• Typically only available for drivers with good to excellent credit.
• You’ll face financial penalties if you exceed your contracted mileage or incur excessive damage to the car.
• You don’t own the car at the end of the agreement.

Personal loan

With a personal loan – also known as an unsecured loan – you’ll borrow an amount in full and buy your car outright. As such, you’re the vehicle’s owner from the get-go, so can choose to sell it at any point after initial purchase. Plus, the loan isn’t secured against the vehicle.

A personal loan may offer lower rates for those with good and excellent credit. These drivers may also be able to access the best interest rates alongside lower monthly repayments.

Pros:

• Simplest option for financing a car, as you’re the legal owner from the get-go.
• Loan not secured against the vehicle.
• Buy from any seller – business or private.
• Good for those with great credit.

Cons:

• Less ideal for drivers with poor credit ratings.
• Securing the advertised rates may be challenging for most motorists.
• Personal loan amounts can be limited compared to other car finance agreements.

Guarantor loan

With a guarantor loan, a third party agrees to pay your loan if you can’t make your fixed monthly repayments. With that in mind, it can be a good option for drivers with limited or bad credit.

Whilst you have a guarantor in place, you are still expected to be financially responsible for making the agreed repayments.

Pros:

• Enables those with a less-than-perfect credit score, or those who haven’t yet had time to build a score, to get a car.
• If you keep on top of your repayments, you’ll be improving your credit score as you go.
• Having fixed monthly repayments over a set period allows you to budget for this kind of agreement.

Cons:

• Usually a higher interest rate (APR) than other finance options.
• The guarantor must fit the lender’s criteria, which normally includes them being a homeowner.
• If you fail to make repayments, your guarantor will become liable. If your guarantor fails to make the repayments, you could both be issued with a County Court Judgement (CCJ), which would damage both your credit profiles and affect your abilities to obtain future credit.

What do you need to apply for car finance?

There are basic criteria you’ll need to meet to be eligible for car finance.

You’ll need to be over 18 and a UK resident of more than three years. We’ll also need to see a valid UK driving licence and proof of a steady income.

There are also documents needed to prove your car finance eligibility, including proof of address and income and a valid ID.

When you apply for car finance, we’ll conduct a credit score check. This initial search is only a soft search, meaning that it won’t impact your credit score. It familiarises us with your financial history without leaving a mark on your credit report. Be aware that if you choose to advance your application, you’ll undergo a hard credit check, which will leave a footprint.

At My Car Credit, we assess the overall affordability of car finance for each applicant – not just their credit score. With us, it’s possible to secure car finance with poor credit, as we combine a wide panel of trusted lenders with a sensible approach to help you find suitable car finance for your circumstances.

How the car finance process works

Finding the right car finance for your needs doesn’t have to feel overwhelming – and with My Car Credit, it won’t be. We help you buy the car you want at the budget you can afford via these easy steps:

1. Use our free car finance calculator to work out your monthly repayments, helping you make a more informed decision about the most suitable agreement for your needs.
2. Once you’ve got a no-obligation quote in mere minutes, you can apply for car finance online with a soft credit search.
3. Our award-winning technology will match you with the right deal and lender based on your unique credit score and circumstances.
4. You’ll then be able to choose your car from a network of trusted dealers with My Car Search.
5. Once the paperwork is signed and all parties are happy, you’ll get to collect your keys and hit the road.

What’s more, our friendly team of expert Car Credit Specialists are on hand throughout the process to help you find a suitable car finance agreement with ease and speed.

Car finance jargon buster: terms you should know

If you’ve come across complex terms during your search for car finance, don’t worry. This car finance guide will break down key finance terms with clear, easy-to-understand definitions including:

APR

This stands for ‘Annual Percentage Rate’. The APR of a car finance agreement refers to the full cost of credit per year in your car loan, taking account of all fees and costs. It’s one of the best rates for comparing different car finance deals. APR is expressed as a percentage of the loan amount.

Balloon payment

A balloon payment – also known as an ‘optional final payment’ – is a lump sum owed to the lender at the end of a car finance agreement. Not all car finance agreements include a balloon payment. The size of this payment is determined by the vehicle’s ‘Guaranteed Future Value’ (GFV).

Guaranteed Future Value (GFV)

The Guaranteed Future Value (GFV) is also known as the Guaranteed Minimum Future Value (GMFV). Set at the beginning of a PCP finance agreement, the GFV is based on factors including the length of your loan, expected annual mileage, the car’s projected retail value at the end of the agreement term and the car’s final condition.

If you decide to keep your car at the end of your finance agreement, you’ll have to make an optional final payment, which is equal to GFV. Alternatively, if you decide to part exchange your car, any positive equity can be put towards a deposit for your next car on finance.

Voluntary termination

If you have to cancel your car finance agreement early, this is known as voluntary termination (VT). It’s a legal right that you have, and can be applied to both new and used vehicles financed via PCP and HP agreements. 

VT is typically only available to drivers who have repaid a minimum of 50% of finance on the original agreement.

Equity / negative equity

In a car finance context, equity refers to the difference between the amount you ultimately sell your vehicle and the amount of outstanding finance left on the agreement. 

Selling your car for more than any outstanding finance means you have positive equity. Alternatively, if you owe more on finance than the car’s value, you have negative equity.

Deposit contribution

A deposit contribution is a financial incentive offered by either a car manufacturer or dealer that you can put towards your car deposit when applying for auto finance.

The lower your initial deposit, the lower your overall monthly repayments and overall interest. Often a deposit contribution is only available to motorists willing to take out a specific type of car finance agreement.

Soft vs. hard credit check

When you apply for a line of credit, the lender or broker will conduct a credit check to establish what kind of borrower you are. 

There are two main types of credit checks – soft and hard. A soft credit check won’t show up on your credit report, so it won’t impact your overall score, whereas a hard credit check has a footprint. Minimising hard credit checks on your credit report can improve your likelihood of obtaining credit.

Mileage limits

Also known as mileage restrictions, mileage limits on a car finance agreement refer to pre-agreed limitations on the number of annual miles that you can drive a vehicle. Mileage limits help finance companies predict a vehicle’s value at the end of an agreement. If you breach these, you’ll face financial penalties.

Only certain types of car finance agreements have mileage limits. Higher mileage allowances typically mean higher monthly payments, as the car is more likely to experience depreciation.

Pros and cons of car finance

Pros:

• Spread cost over time – Car finance agreements help you to spread the cost of a vehicle into affordable monthly repayments, plus interest.
• Access to better/newer vehicles – Agreements like PCP and PCH are ideal for drivers who want regular access to the most up-to-date vehicles.
• Flexibility in vehicle choice and ownership – Car finance agreements through My Car Credit are highly flexible, allowing you to choose terms that are most suitable for your circumstances and needs.
• Potential to build credit – Making your repayments on time can improve your credit score over time, improving your future loan chances.

Cons:

• Interest and fees – The car finance rates you can access vary depending on your credit score.
• Ownership may be conditional – You won’t own the car until you make all your repayments in full.
• Penalties for early termination or excess mileage – If you breach certain conditions of your agreement, you can face financial penalties.
• Missed payments can affect credit score – Missed car finance repayments can negatively impact your credit score.

What happens if I pay off my car finance early?

It’s more than possible to make early repayments on car finance. In fact, if you pay off your car finance early, you’ll receive a rebate of interest. However, you may also need to pay an early repayment charge – also known as a settlement figure or fee.

With both PCP and HP car finance agreements, you can contact your lender to request a settlement fee. Typically once you’ve asked for this figure, you’ll have around 28 days to decide whether you want to proceed with early repayment.

Benefits of early payoff:

• You’ll own the car sooner.
• You won’t have to make your monthly repayments, and may benefit from a rebate of interest.
• This can then free up your monthly budget to put towards other finances.

Which car finance option is best for me?

One of the best things about My Car Creidt’s car finance agreements is their flexibility. There’s no one-size-fits-all car finance agreement – the most suitable option for you will depend on your unique circumstances and needs. 

Some of the factors that can help you determine which car finance agreement might best suit include:

• Budget – Consider whether you have the funds to make an initial deposit and lower your monthly repayments. Evaluate the monthly affordability of a car finance agreement in light of your financial circumstances.
• Ownership goals – Do you want to own the vehicle, or is a long-term lease (rental) that allows you to regularly switch up your car preferable?
• Mileage habits and lifestyle – If you regularly make long-haul journeys, a car finance agreement with mileage restrictions might not best suit your driving needs.

In this section of our car finance guide, we outline a few examples of different drivers, indicating the car finance agreement that might best suit their circumstances: 

• “I want to keep my car long-term” → HP or Personal Loan
• “I like switching cars every few years” → PCP
• “I want minimal commitment and no ownership” → PCH

   

If you have questions about the right kind of car finance for you, speak to a My Car Credit advisor for expert advice and support. Alternatively, you can kickstart your car finance journey with our car finance calculator to compare your options with a no-obligation quote. 

What are the alternatives to car finance?

Car finance may be one of the most popular ways of paying for a car – but it’s not the only strategy for doing so.

Key alternatives include:

Cash purchase

If you have the upfront cash to pay for a vehicle in full, this is a great alternative to car finance. You won’t have any debt or need to repay interest, and you’ll be the car’s legal owner from day one.

Bank or personal loan

With a bank or personal loan, you’ll borrow a fixed sum then repay it in monthly instalments plus interest – just like car finance. These loans are most suitable for applicants with strong credit, and allow you to own the car outright whilst repaying the loan separately. However, monthly repayments for these loans can be higher compared to some forms of car finance.

Car subscription services

With these products, you’ll pay a monthly fee that covers use of the car plus insurance and maintenance. Car subscription services are more expensive than car finance, but are flexible and all-inclusive.

Leasing (PCH)

PCH agreements are leasing agreements – there’s no option of ownership at the end of the agreement. They’re ideal for drivers who want to regularly upgrade their drive without the resale hassle.

How does car finance compare?

Car finance agreements are a great middle ground between cash purchase and leasing options. They offer flexibility and affordability for drivers with all credit profiles, with the option of eventual ownership once all finance has been cleared.

Can I get car finance if I’m a young driver?

It’s possible to secure car finance even as a young driver, but it may be more challenging due to a limited credit history and income. 

The minimum age to apply for car finance is 18, and most lenders will look at your employment status, affordability, and your credit file. They’ll want to see some kind of regular income, even if it’s part-time.

Top tips for young drivers:

• Use a guarantor
• Choose a lower-cost vehicle 
• Consider black-box insurance, or purchase a car that’s cheap to insure for young drivers 
• Apply through a broker like My Car Credit to improve your chances of approval

Can you get car finance with bad credit?

It’s entirely possible to secure poor credit car finance. 

At My Car Credit, we understand that there are plenty of reasons why a driver might have a less-than-ideal credit profile. We work with specialist lenders who bring a sensible approach to selecting the most suitable car finance agreement for each driver’s needs and circumstances.

Our initial soft credit search can show you the kinds of car finance for which you might be eligible without impacting your overall score. 

You’ll increase your likelihood of car finance approval if you increase your deposit, use a guarantor, and work to improve your credit score.

Why use My Car Credit?

My Car Credit is part of Evolution Funding – the UK’s largest motor finance broker. As such, we’ve got access to 30+ lenders and 4,500+ trusted dealers. Our award-winning technology combines with this broad lender panel to improve your chances of securing affordable, flexible car finance that’s tailored to your needs.

We offer competitive rates and transparent terms, and our initial soft credit search won’t affect your credit. Our digital-first approach streamlines and speeds up your online car finance search, and our approachable team of Car Credit Specialists offer expert support every step of the way.

Car finance with My Car Credit

Car finance is flexible, accessible, and frequently the best way to afford a vehicle. Having read our car finance guide, you’ve got the right knowledge to take the next step in your car finance journey. 

Use our car finance calculator to see the kinds of terms that you could benefit from. You’ll receive a no-obligation quote in mere minutes, and can start your car finance application with confidence.

If you’ve still got questions, contact My Car Credit for personalised support from our professional team of experts. You’ll speak to a real person who knows car finance like the back of their hand.

Frequently asked questions (FAQs)

Can I get car finance with bad credit?

At My Car Credit, you don’t need a perfect credit score to secure car finance. We look at each application individually to help drivers secure the most suitable car finance agreement for their circumstances, no matter their credit score.

How much deposit do I need?

There’s no one-size-fits-all approach to a car finance deposit. As a general rule, expect to pay a deposit of between 10-20% of a vehicle’s total cost. Paying a larger deposit can reduce your monthly car finance repayments and interest rate.

Can I settle car finance early?

Both early repayment and voluntary termination are options with some car finance agreements. However, you may face penalties or need to pay a settlement figure depending on your auto finance agreement and lender.

Is it better to buy or finance a car?

Car finance is a great option for drivers who want to break down the full cost of a vehicle into affordable monthly instalments plus interest. With agreements like HP, you’re automatically the vehicle’s owner once the finance has been cleared in full.

Does car finance affect my credit score?

As with any line of credit, car finance will show up on your credit report. Provided you make your monthly repayments in full and on time, this can improve your credit score, potentially improving your eligibility for future loans.

What’s the difference between PCP and HP?

Both PCP and HP are popular car finance agreements. Monthly repayments are lower on PCP, and there’s flexibility with end-of-agreement options. However, you’ll face mileage restrictions and an optional final payment to own the car at the end of the term.