What Are The Different Types Of Car Finance?

Have you decided on which financing arrangement you’re going to choose among the different car finance types? If you haven’t picked one, don’t worry. It’s a good thing that you’re taking your time to learn as much as you can about the various car finance deals available in the UK.

As you know, buying a car, whether brand new or second-hand, is going to be a big purchase. It’s crucial that you do things right every step of the way so that you won’t end up spending money unnecessarily. One of the first things you need to ask yourself is, “can I afford this car?” and “how am I going to pay for it?”

If you want to buy a car, you don’t need to spend all of your money to make the purchase. Car finance will allow you to buy the vehicle that you want while spreading the cost of the car through a series of monthly payments for a number of years. This means you don’t have to worry about spending your cash on one big purchase. So how exactly does car financing work?

How Car Finance Works

When you get car finance, you can buy a car without paying the full amount in cash. Instead, you will be paying a fixed amount every month for a certain period. Two of the most common car finance deals are Personal Contract Purchase and Hire Purchase. Other deals include car leasing and personal loans. We’ll give you an overview of the most important details you need to know about these car finance types. 

Hire Purchase Car Finance

A hire purchase car finance agreement is when you hire the vehicle from the car finance company until such time that you’ve finished paying off the monthly payments. Your loan is secured against the car, and you are not yet the owner of the vehicle until you finish your contract and your payments with the car finance company

Many car buyers prefer this type of car finance deal. If you choose a Hire Purchase agreement, you have the option to pay a deposit upfront. Doing so will help reduce the amount you have to pay monthly. And once everything’s been paid off, you are then the legal owner of the vehicle. 

Personal Contract Purchase

This type of car finance is also known as PCP agreement. It’s a lot like Hire Purchase because you’re going to pay the lender a fixed amount every month for a few years. The monthly repayments with PCP are much lower compared to Hire Purchase. The main difference between the two is that with PCP, you have the option to buy the car or return it when your contract ends. 

If you want to own the car under a PCP agreement, you need to pay a final balloon payment. But if you don’t want to, you can return it to the lender. If you choose the second option, see to it that you didn’t exceed the allowable mileage and that the car is still in good condition. Any damage apart from the usual wear and tear would mean additional payments and fees. 

Personal Loan Car Finance

A personal loan is the same as an unsecured loan. With this agreement, you can borrow money from a lender which you can then use to purchase the vehicle you want. You will immediately be the owner of the car once you pay the car dealer. 

What’s good about this deal is that it’s not secured against the car, unlike the previous two kinds of car finance. So, if you ever need to sell the vehicle, you can do so because you are the owner and you don’t need permission from the car finance company. 

Most financial institutions require the borrower to have an excellent credit score before granting a personal loan. If you don’t have a good credit score, you may find it difficult to get this type of financing, or if you do find a lender who is willing to lend you money, the interest rate might be too high. 

Guarantor Car Finance Loan

The best way to get a good car finance deal is to make sure that your credit score is superb. If it’s not looking great, you may want to take some time to improve it before applying for car finance. However, if you want to expedite the process of getting your new set of wheels, you have the option to get a guarantor who can vouch for you. 

With a guarantor loan, you can ask another person with an excellent credit history and score to act as your guarantor. It can be your parent, relative, or friend, but not your spouse. The person you choose must have a full understanding of their responsibilities as a guarantor. If you ever fail to make a payment, they would have to pay it on your behalf. 

Car Leasing

The last car finance type that you can choose is car leasing. It is much like renting a car but for a longer period such as two years. It is similar to other types of car finance because you will be paying a fixed amount every month. However, at the end of your contract, you need to return the vehicle to the lender in good condition. 

One of the pros of car leasing is that you don’t have to worry about the car’s depreciation since you’re not going to own it anyway. You also get to change vehicles every year if you want to. Imagine that, you can drive a brand-new car each year. The downside, of course, is that the car will never be yours after paying for it every month like in Hire Purchase. 


These are the different car finance types available to UK car buyers like you. Which among them best suits your financial situation, budget, and preference? Take all the time you need to study them closely so that you can pick the right car finance deal for you.