Car Finance Explained

How does car finance work?

Financing is a way for you to buy a car without needing to pay the whole amount upfront. The way car finance works is that you borrow money from a lender to cover the cost of your new or used car and then pay it back in affordable monthly repayments. Instead of paying the entire cost of the car in one go, buyers can spread out the cost over a set period through these monthly payments. This makes owning a car more accessible to a wider range of people.

You’ll need to know how much you want to borrow and how long you want to borrow it for (the loan term) to find the car finance deal that’s right for you. You can also put down a deposit to reduce the total loan amount. If your loan is approved, you’ll then pay it back in monthly instalments, plus interest, for the duration of the loan term, which typically lasts between one and five years. Depending on the deal you choose, your finance might be secured against the car.

How Much Can I borrow?

The amount of money you can borrow for car finance varies based on several factors. These factors include, but are not limited to, the chosen finance option (such as Hire Purchase, Personal Contract Purchase), the length of the finance term, and the interest rate applied to the loan. Affordability is a key consideration, as lenders assess an individual’s financial situation to determine how much they can comfortably repay each month.

We work with a number of lenders to provide deals that are right for you, and our team is always on hand to guide you through the process, from start to finish – they’ll even help you find a car to suit your budget and needs.

Types of car finance

Hire Purchase

The most popular type of car finance is Hire Purchase.
This involves monthly payments and you own the car outright at the end of the agreement.
With hire purchase, the loan is secured against the car and you won’t own it until you’ve reached the end of your agreement. You might need to put down a deposit but it’s unlikely that you’ll have to agree to any mileage restrictions.

Personal contract purchase (PCP)

Personal contract purchase (PCP) is a type of car finance that differs from various other types of finance in that it can act like a long-term car rental agreement if you choose not to make the final balloon payment. PCP lets you loan a car from a finance provider, with you making monthly payments over an agreed period – usually between 24 to 36 months, although some providers offer longer periods. You then decide at the end of the term whether to return the car, pay a ‘balloon payment’ to keep it, or get another car using any equity there might be in your car. This is explained in further detail below.