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Car Finance Explained

Understand the best types of car finance options available for you

What is car finance?

Car finance is a collective term surrounding a variety of different ways of borrowing money to pay for your car. A credit agreement struck up between you and a lender ensures a transparent method of paying for your vehicle.

You can either finance the car, making monthly payments with the end goal of owning the vehicle. Or you can lease the car - essentially renting it - making monthly payments with the view of returning the vehicle at the end of the contract.

How does car finance work?

A car finance agreement between you and a lender is a contract committing you to paying an agreed amount, over an agreed period. This will usually include either a fixed or variable interest amount to the lender for the convenience of supplying finance.

Most lenders are similar in the information they need from you to proceed. You will need proof of identity, your personal details - including personal income, employment details and address - a valid driving license, and credit report.

Once your details are approved, you can then explore your options. If your credit score is at the lower end of the scale, it doesn't mean you won't be able to get a finance agreement. It might result in your options being more limited, but there should still be options available to you.

Types of car finance

Personal Contract Purchase (PCP), Personal Contract Hire (PCH) and Hire Purchase (HP) are the most popular options for securing car finance.

Personal Contract Purchase (PCP) is probably the most popular way to buy a car. This is thanks to the ability to make a bulk payment at the end of the contract, reducing the monthly payments. Along with fixed interest and other reassuring qualities.

Personal Contract Hire (PCH) finance is a form of rental - perfect for those wanting to upgrade every couple of years or simply preferring not to outright own a vehicle. If further flexibility is what you need, with Hire Purchase (HP) finance you have the freedom to choose your deposit, fix your interest amount and can settle the agreement at any point.

Best car finance options

The best car finance option completely depends on you. Your situation and your requirements will be unique. The options we explore below are a guide to what each type of finance provides. It's then up to you to decide which suits you and your needs best.

Personal Contract Purchase - PCP Explained

Personal Contract Purchase, usually known as PCP, is a very popular way to purchase a car that has some great benefits. It defers some of the vehicle cost until the end of the finance agreement. The deferred amount is known as the Guaranteed Minimum Future Value (GMFV) or sometimes as the Optional Final Payment. Interest on this deferred amount is included in the monthly payments that you are quoted.

You have the flexibility to choose the amount of deposit and the term of the agreement and as this is a fixed interest loan the payments will not change during the agreement.

You agree an annual mileage as part of this agreement and it is important that this is accurate. If you exceed the agreed mileage, and choose to hand your car back at the end of the agreement, then excess mileage charges will apply. Your car must also be in fair condition for its age and mileage. Your vehicle is at risk of repossession if you do not maintain the contractual repayments. We receive a commission from the Finance Lender if you take out a finance agreement.

*At the end of the agreement you have three choices:

  • 1. Pay the GMFV in order to own the car;
  • 2. Hand the car back.
  • 3. Use any value above the GMFV as a deposit against another car.
  • There is no guarantee that there will be any value above the GMFV.

Personal Contract Hire - PCH Explained

Personal Contract Hire, usually known as PCH, is another popular way to pay for the use of a car that has some great benefits. It's a fantastic option if you want to drive a new car every few years, and don't want the option of ownership.

Just pay your initial rental, and then make your monthly rental payments for the length of the agreement.

Hire Purchase - HP Explained

Hire Purchase is a way to buy a vehicle with the flexibility to choose the amount of deposit and the term of the agreement. As this is a fixed interest agreement the monthly payments will not change during the agreement.

This is an agreement secured against the vehicle and you will not own the vehicle until you have made all of the payments, including any option to purchase fee. You can settle the agreement at any point by paying the outstanding amount.

Your vehicle is at risk of repossession if you do not maintain the contractual repayments. We receive a commission from the Finance Lender if you take out a finance agreement.

Representative Finance Example For Online Purchases
Customer deposit £99
Monthly payments £272.01
Cash Price £15,000
Amount of credit £14,901
Fees £0.00
Optional final payment £6,912
Total amount payable £20,067.48
Annual mileage 8000*
Term 48 months
Fixed rate of interest 6.15%
Representative APR (fixed) 11.70%

We are a credit broker and not a lender. Finance is subject to status and finance company acceptance. We can introduce you to a limited number of lenders and their finance products. We will receive a commission from the lender, as a fixed percentage of the amount you borrow, when we arrange the finance for you. These arrangements are negotiated with our lenders in advance and do not give us any discretion to negotiate or adjust your annual percentage rate (APR) or any other item included in the total charge for credit. The APR may vary according to your credit score or the amount you borrow. The value of the commission we will receive is set out in the Demands and Needs document we will provide to you. The commission paid to us is included within the cost of your finance. Some lenders may provide preferential rates to us for the funding of our vehicle stock or provide us with interest free loans. The finance rate will vary dependent of customer personal circumstances for in dealership purchases.

We are a credit broker and not a lender. Finance is subject to status and finance company acceptance. We can introduce you to a limited number of lenders and their finance products. We will receive a commission from the lender, as a fixed percentage of the amount you borrow, when we arrange the finance for you. These arrangements are negotiated with our lenders in advance and do not give us any discretion to negotiate or adjust your annual percentage rate (APR) or any other item included in the total charge for credit. The APR may vary according to your credit score or the amount you borrow. The value of the commission we will receive is set out in the Demands and Needs document we will provide to you. The commission paid to us is included within the cost of your finance. Some lenders may provide preferential rates to us for the funding of our vehicle stock or provide us with interest free loans. The finance rate will vary dependent of customer personal circumstances for in dealership purchases.