Skip to content

Car Finance Explained: Your Car Finance Options

Taking the mystery out of your car buying journey.

Flipchart showing explanation of car finance options
Part of Evolution Funding, the UK’s largest motor finance and technology provider.
Part of Evolution Funding, the UK’s largest motor finance and technology provider.

Buying a new car is an exciting experience. It's also one of the biggest purchases you'll make. It's important to understand all of your options, especially when it comes to the question of how you'll pay for your car.

If you’re thinking of using finance to buy a car, you may be feeling confused by all the finance options available. With so many products on the market and lots of confusing jargon, taking out a car loan can become a minefield.

Our ‘Car Finance Explained’ guide is designed to take the mystery out of all the different car finance options, so that you can focus on enjoying your car buying journey!

How does financing a car work?

For most people, buying a car outright isn’t possible. For this reason, more and more people are opting to finance the car of their dreams.

Car finance allows you to drive a car without having to pay a large lump sum payment upfront for the car. You make affordable monthly payments directly to the lender. The lender owns the car until you have paid the borrowed amount (plus interest and any charges) in full. This is done through monthly instalments as well as balloon payments (more on this later). Whilst you are paying for the car, you have full use of it – as though it is yours.

The monthly payments, the interest rate, the terms of the agreement, and your options at the end of the agreement, will all vary depending on which finance option you go for. Below we go into more detail about your different car finance options to help you find the best deal for new cars.

What are my car finance options?

It is important that you understand the difference between your finance options for a car. Not all finance packages are suitable for everyone, and your circumstances may dictate the best option for you. Below we run through the pros and cons for each type of finance – from a hire purchase agreement to secured loans.

How does Hire Purchase work?

A Hire Purchase agreement, or HP, is considered the simplest type of car finance deal – which is why it’s so popular. It allows you to spread the cost of the car, plus interest, across a set period of time. With a Hire Purchase agreement, an initial deposit is not always necessary.

However, it is worth bearing in mind that deposit contributions will bring down the balance, limiting the amount of interest incurred for lower monthly payments. Many people trade in their old car to provide a deposit for new car hire purchase.

The lender simply takes the price of the car (minus any deposit) and adds interest. The final hire purchase figure is then divided over the term agreed, usually between two and five years.

The payments never change throughout the HP agreement, allowing you to budget for your outgoings. There is no large balloon payment at the end, although there is usually admin and transfer of rights fees to pay. Once you’ve paid the Hire Purchase agreement off in full, you own the car outright.

Hire Purchase pros and cons

White Mercedes coupe bought on conditional sale finance

What is Conditional Sale?

Conditional Sale is similar to Hire Purchase, except that you pay higher payments and don’t have a fee at the end. As soon as you’ve made the final payment, the vehicle becomes yours.

Conditional Sale pros and cons



What is Personal Contract Purchase (PCP)?

Personal Contract Purchase (PCP) finance has gained popularity because all the payments each month are lower compared to hire purchase, allowing you to buy a car that’s newer or with higher spec. However, this type of agreement is also a little more complicated than Hire Purchase (HP).

With a personal contract purchase agreement, your fixed monthly repayments are lower because a significant proportion of the borrowing is deferred to an ‘optional final payment’ at the end of the agreement. This payment is often called a ‘balloon payment’, which is a final lump sum payment allowing you to own the vehicle outright.

You’ll need to decide how much deposit you want to make on your PCP deal. You’ll also need to estimate your expected annual mileage and decide how long you want the agreement to run for – normally between two and four years.

Guaranteed Future Value (GFV) explained

The lender will use this information to calculate the Guaranteed Future Value of the car, or the GFV. The GFV is a forecast of what the car will be worth at the end of the agreement, based on your initial estimate of your yearly mileage. This value forms the ‘deferred final payment’ and is guaranteed by the lender.

To work out your ongoing payments for a PCP deal, your initial deposit and the balloon payment are deducted from the price of the car. The amount left over, plus interest, is then divided over the term and forms the fixed, payments each month for PCP.

You must be realistic about your expected mileage as excess mileage charges are expensive. You’ll also be expected to return the car in good condition at the end of your PCP deal. Any damage that is not classed as ‘fair wear and tear’ will also be subject to charges. Your contract will detail the terms and conditions of the car finance agreement and so it is important to read your paperwork thoroughly before signing on the dotted line.

At the end of the personal contract purchase agreement, you will have three options.

You can part-exchange the car for a newer model. If, at the end of the agreement, the car is worth more than the optional payment, you can use this equity as a deposit towards your next car.

PCP finance pros and cons



Blue Ford Fiesta bought with personal car loan

How do Personal Car Loans work?

With a personal loan, or unsecured loan, you borrow the full amount and buy your car outright. If you have a good credit score, you will be able to access the best interest rates for a personal loan, which could be cheaper than other options – meaning low monthly payments.

Since the car belongs to you from the beginning of the agreement, you can choose to sell the car at any time after buying with a personal loan.

Personal loans are a good option for customers with a strong credit rating, although the same customers could benefit from the best rates for a new car with other finance options too. It’s also worth noting that a personal loan may be the only option if you’re buying from a private seller.

Pros and cons of taking out a personal loan



What is Guarantor Car Finance?

A guarantor loan can be an option where you have bad credit history and poor credit rating. Guarantor car finance involves a third party agreeing to pay your loan if you can’t make the fixed monthly repayments.

A guarantor loan can provide the opportunity not only to drive a car, but also build up your credit profile and credit rating. However, it is also a big responsibility since your guarantor is liable for your finance if you do not repay it. You can read more about Guarantor Car Finance here

Guarantor Loan pros and cons



Grey Landrover Discover bought on personal contract hire

What is Personal Contract Hire (Leasing)?

Personal Contract Hire (PCH) or Leasing basically means that you rent the vehicle for a set period of time. Personal Contract Hire is great if you like changing your car often but wish to avoid the associated costs, such as a car’s depreciation.

At the start of a lease agreement, you will need to decide on your expected annual mileage and lease period. The higher your mileage, the higher your monthly payment, since the car will be worth less once you hand it back.

You will normally need to pay a deposit upfront, and then monthly payments to lease the car. At the end of the agreement, you will need to hand the car back, and there is no option to buy the car. The car must be returned in an acceptable condition that meets ‘fair wear and tear’ guidelines. Where damage is excessive, charges will apply for the repairs.

Car leasing pros and cons



Car Finance Jargon Buster

The finance industry is full of unusual terminology, which can make applying for car finance even more daunting. Our jargon buster helps shed light on some of the most common car finance terminology.

Frequently Asked Questions

Rates from 9.9% APR. Representative APR 12.4%

As long as you live in the UK (or have been a resident in the UK for at least three years), you are over 18 years old, and are in employment, you can apply for car finance with us. Complete the online application form for an instant decision.

We will give you an instant, online decision which will give you an expected annual percentage rate (APR) based on your credit profile. Our APRs start from 9.9% for a strong credit profile and rise in line with your credit status.

Yes, as long as it is from a reputable UK motor dealer. If you haven’t found a car yet, we can help you find a quality nearly new or used car from one of our approved dealers. These are car dealers that have been vetted by our finance company for their financial stability and service standards.

We’ve helped thousands of applicants with poor credit to get car finance. We have the largest panel of lenders out of any car finance broker. This means we may be able to approve you for a car loan where others haven’t. Start by completing the online application form and one of our car credit specialists will contact you to discuss your options.

Our best car loan rates start from 9.9% APR. If you have an excellent credit profile, you are a homeowner, and are over 25 years old, you will usually qualify for this rate. Our offer will be based on the strength of your credit profile, and our unique motor finance technology ensures you’re matched with the best product and lender for your circumstances.

A representative APR is the rate that the majority of borrowers will receive – it is the rate that at least 51% of customers are offered. You can read more about how car finance interest rates work here.

Our specialist motor finance technology assesses your application, credit profile and personal information against the criteria of our large panel of lenders. We can then match your application to the most suitable lender and product. Our goal is to find you the best deal available for your circumstances.

Yes, you can get pre-approved for car finance before committing to buying a car – in fact, it’s very common! Once you find a car, we will amend your loan amount on your application and recalculate your monthly costs. You can also amend the length of your loan, so long as it does not exceed five years.

Your loan will not become active until the dealer has been paid for the car. If your loan has been accepted and you have not collected your car, you can change the loan amount or cancel at any time. Your car finance agreement will have a 14-day ‘cooling off’ period, from the date of the agreement itself.

We are happy to accept joint applications but would always expect the loan to be in the name of the registered keeper of the car.

Yes, you can pay off your loan at any time. You will receive a rebate of interest if you pay off the loan early. You can also make overpayments with most of our lenders to help shorten the length of your car loan.

We will not send your data to any third parties other than the lender that has been selected to approve your loan. Our lenders are not permitted to use your data for any other purpose than to process your application for car credit.

Most of our applications are given an instant online decision. We will also send you an email, usually within a few minutes. Sometimes it takes longer for us to get you the right rate for your circumstances, but we will always contact you within a few hours of your application.

There are a number of stages once you’ve been accepted for finance: checking and approval of your ID and proofs; signing of your finance agreement (which you can do online, from the comfort of your home); and release of funds by lender to the dealer. Once the dealer has been paid for the car by the lender, you can then collect your car. The length of time varies dependent on the lender and dealer, and we work as fast as we can to complete your application.

Each lender has their policies on what will be required to prove your identity. As a minimum, you will be expected to produce your driving licence and a selfie. Other documents could include proof of address and proof of income. Your car credit specialist will advise you on the documents needed by the lender to complete your car finance application.

Most funders will say that the car must be no more than 12 years old at the end of the proposed finance period. The car must also have mileage less than 100,000 miles at the start of the agreement. We do have funders who will accommodate older cars and higher mileage, but your finance options for those cars will be limited.

My Credit Rating


  • You are a home owner
  • You have been on the electoral role for a long period of time
  • You have current credit arrangements and mortgage with no defaults
  • You have no CCJs, credit arrears or missed payments
  • You rarely apply for credit
  • You are employed or self-employed


  • You are on the electoral role
  • You are a home owner or long standing tenant
  • You have a stable employment history
  • You have current credit arrangements with occasional missed payments
  • You have no CCJs


  • You are or have recently been on the electoral role
  • You may have recently changed address
  • You may have occasional missed payments
  • You may have an old CCJ
  • You may have regularly applied for credit


  • You may have had frequent changes in address
  • You may not be traceable on the voters roll
  • You may have exceeded credit card limits
  • You may have missed payments on current agreements
  • You may have had a CCJ in the past


  • You may not be traceable on the voters roll
  • Your credit cards are over their limits
  • You have recent CCJs
  • You may have been refused credit elsewhere
  • You may be in a debt management plan

X monthly repayments of

Typical rate

Loan amount

Total payable




*for illustration purposes only

No impact on your credit score*

Representative Example

Borrowing £7,500 at a representative APR of 12.4%, annual interest rate (fixed) 12.36%, 47 monthly payments of £196.44 followed by 1 payment of £206.44 (incl. estimated £10 option to purchase fee), a deposit of £0.00, total cost of credit is £1,939.12, total amount payable is £9,439.12.

Evolution Funding Limited, trading as My Car Credit, is a credit broker and not a lender.

Please ensure you can afford the repayments for the duration of the loan before entering into a credit agreement.

*Initial application is a soft search. Should you progress, some lenders may perform a hard search on your credit file.

Require more help?

Can’t find the information you’re looking for? Need some support or guidance? Get in contact – our friendly and experienced Car credit Specialists are here to help!

Require more help?

Get in contact – our Car Credit Specialists are here to help!
Green and yellow speech bubbles