Fixed payments over an agreed time period No set mileage or damage restrictions

You won’t legally own your car until the end of your payment term Your car could be repossessed if you don’t keep up your monthly payments

Flexibility when it comes to the end of your contract You don’t have to pay an initial deposit, and payment terms can be flexible

Set mileage restrictions over the course of your contract If you choose to buy your car at the end of your term, your balloon payment can be expensive

Lower payments over the course of your contract, ideal for those looking to keep costs down Access to newer cars each time your contract is up, with no commitment needed Flexible initial payment terms

You won’t own the car, and so you can’t sell it on, modify it or exceed your mileage agreement

No initial deposit needed Your vehicle will legally belong to you immediately (although you still need to repay your loan in full) No limits on the make, model or mileage of your chosen vehicle

Interest rates can be higher than other types of car finance You are likely to be refused a loan if you have a poor credit score

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Understanding types of car finance

21/08/2024

As one of the most expensive purchases you’re likely to make in your lifetime, car finance is a popular alternative for making the cost of a new car more manageable. There are four types of car finance most commonly used in the UK: personal loan, hire purchase, leasing and PCP (personal contract purchase).

Purchasing your car through finance doesn’t mean you’re limited when it comes to selling it on. Online buyers like Money4YourMotors can buy vehicles with finance payments still to be made. Find out more about what financed vehicles we accept.

What are the different types of vehicle finance?

Hire purchase
Personal contract purchase (PCP)
Personal contract hire (PCH)
Personal loan

Types of finance compared

As well as the type of vehicle you want to finance, you’ll need to carefully consider your budget when it comes to choosing how to pay for your vehicle. Think about whether you want to own or return your current vehicle, the best payment method for your lifestyle, and how long you’ll need to pay back your lenders in full.

Type of finance	Vehicle owner	Payment method	Length of term
Hire purchase	Your lender, until your contract ends	Initial deposit and monthly payments	Usually between 1-5 years
PCP	Your lender, unless you choose to buy the vehicle outright	Initial deposit, monthly payments and an optional balloon payment (if you choose to buy the vehicle outright)	Usually between 3-5 years
PCH	Your lender	Initial deposit and monthly payments	Usually between 1-5 years
Personal loan	You	Monthly payments	Flexible

Hire Purchase

One of the more flexible options available when it comes to finding your choice of vehicle, hire purchase allows you to work towards owning your vehicle, via an initial deposit and monthly payments. While your lender will own your car until you pay it off, you’ll be noted as the registered keeper, so you’re responsible for taxing, insuring and servicing the vehicle.

Fixed payments over an agreed time period
No set mileage or damage restrictions

You won’t legally own your car until the end of your payment term
Your car could be repossessed if you don’t keep up your monthly payments

Personal Contract Purchase

The most common way of financing a car in the UK, PCP, or personal contract purchase, gives you more flexibility when it comes to the end of your contract. Once all payments have been made on the vehicle, you’ll legally own it.

When you’re coming to the end of your agreement, you have a range of options available, depending on whether you want to keep your vehicle or not;

Return your car at the end of the contract, once you’ve paid off your monthly terms
Pay a final ‘balloon’ payment at the end of your contract to keep your car
Begin a new contract once your current term ends, and use the resale value towards another car.

Flexibility when it comes to the end of your contract
You don’t have to pay an initial deposit, and payment terms can be flexible

Set mileage restrictions over the course of your contract
If you choose to buy your car at the end of your term, your balloon payment can be expensive

Personal Contract Hire

Sometimes known as leasing, personal contract hire allows you to drive a new car every few years. If you’d like to upgrade your motor to the newest spec, this could be the best option for you.

Because you’re only leasing your vehicle, you won’t be able to buy it from your lender at the end of your agreement.

Lower payments over the course of your contract, ideal for those looking to keep costs down
Access to newer cars each time your contract is up, with no commitment needed
Flexible initial payment terms

You won’t own the car, and so you can’t sell it on, modify it or exceed your mileage agreement

Personal Loan

With a personal loan, you have the option to take out a loan for the full price of your vehicle, which means you can buy it outright. Just like other finance options available, you will pay the loan back each month for a set length of time, which is usually agreed at a fixed interest rate.

No initial deposit needed
Your vehicle will legally belong to you immediately (although you still need to repay your loan in full)
No limits on the make, model or mileage of your chosen vehicle

Interest rates can be higher than other types of car finance
You are likely to be refused a loan if you have a poor credit score

FAQs

What's the most common type of car finance?

PCP (personal contract purchase) is the most commonly used method for those looking to purchase a new car. When opting for PCP, you will put down a non-refundable deposit and borrow the rest, meaning you won’t have to buy the car outright.

What’s the oldest car you should finance?

Most lenders – and online buyers - prefer newer cars with lower mileage, as they tend to hold their value better than older vehicles. Cars that are older than 10 years of age may be less eligible for loans, but there are some lenders on the market who will consider cars as old as 12 years.

What affects getting car finance?

Lenders need to make sure that you’re able to make repayments on any type of loan you take out, so you might need to pull together documents like proof of address and previous bank statements in order to prove your income. Credit scores can also play a big part in determining what type of loan rate you get.

What is the most common financed car in the UK?

In 2023, the Ford Fiesta was the most financed car in the UK, with 2,329 agreements made. This was followed closely by the Volkswagen Golf and BMW 3-series.

If you’re in the market to sell your old vehicle, our quick and free online valuation will help you find out how much your car could be worth. Get in touch with our friendly team to find out if your financed car is eligible for resale.