What Different Types of Car Loans Are There in the UK?

A new car can cost tens of thousands of pounds - a large sum to pay out all at once, especially with the rising costs of living at the moment! If you're lucky enough to be able to pay for this out of pocket, then good for you, but if you're anything like most of the UK, you'll need car finance.   

Car finance is a powerful method of spreading the expense of a car over a period of months or years. However, there are hazards and expenses associated, so do your research properly and compare offers before obtaining car finance.

When it comes to car finance, there are four options you can choose from: hire purchase, personal contract purchase, leasing, or a personal loan. As with any financial transaction, it's critical to understand what you're agreeing to. The best option for you will be determined by your budget, and whether you intend to update your car in a few years.

Buying a car is one of the few major purchases you'll make in your life, so make it count. It can be an exciting experience, but you should also be reasonable and realistic about what you can afford.

If you're looking for a new automobile on a budget but aren't sure how to pay for it, we're here to help. This article will help you on your road to purchasing your new car, no matter which type of car finance is best for you. Let's dive in. 

The Types Of Car Loans UK

There are four different options for car finance. Let's go through them all.

The Personal Loan

A personal loan will provide you with enough funds to purchase a car outright. You will then repay the loan over a certain period of time, generally at a fixed interest rate.

A personal loan will provide you with enough funds to purchase a car outright. You will then repay the loan over a certain period of time, generally at a fixed interest rate.

A personal loan has the advantage of being unsecured, which means you are not required to use an asset (like your vehicle or house) as collateral. If you fail to repay the loan, the lender can sell the security to recoup their investment. Because an unsecured loan carries less risk for you but a greater risk from the point of view of your lender, you will probably need a sufficient credit score to be approved.

Personal Contract Purchase (PCP)

A Personal Contract Purchase (PCP) loan is basically a loan through which you don't borrow the entire price of the car you're buying. A PCP agreement entails that you pay a deposit (typically around 10% of the car's worth but occasionally more) and then make a predetermined amount of monthly payments. Do bear in mind that you will not own the car at the end of your contract though.

Your monthly payments will be determined by the car's purchase price, the interest rate (APR), and how much the car's value is predicted to decline over the life of your contract (which is what is known as depreciation).

Applying for a PCP contract means that the car finance provider will determine the car's expected minimum worth at the conclusion of the agreement. This is known as the GMFV (Guaranteed Minimum Future Value).

You have two alternatives at the completion of the loan term: return the car with no further fees, or incur an optional 'balloon payment' if you wish to purchase the car outright. This fee takes into account the GMFV of the vehicle, as specified in your contract.

Hire Purchase (HP)

Hire Purchase (HP) agreements are simple: you usually pay a deposit (typically a minimum of 10% of the car's worth) and then pay off the car's value plus interest in monthly instalments over a set time. These often span between one and five years.

To gain possession of the car at the conclusion of the term, you will pay a 'transfer charge' or 'option fee.' It's critical to note that you won't own the car until this payment is completed, which means you won't be able to sell it without getting the lender's approval beforehand - though this last cost is frequently rather little. Costs vary from lender to lender - the great news is that here at Carmoola it is just £1!

Furthermore, with a hire purchase agreement, your loan is secured against the vehicle, so if you stop making payments, the firm may repossess the vehicle to reclaim the money you still owe. It is important to note that if you terminate a hire purchase arrangement early, you may be required to pay a penalty cost.


When you lease a car, you never truly own it; instead, you make recurring payments to use it. The amount you're charged is typically determined by the worth of the automobile, the length of time you'll use it, and an agreed-upon mileage allowance.

You could be able to pay less each month compared to going through proper car finance, but there may be additional expenses. If the automobile is a little scuffed up towards the end of the lease, you could well be charged an “excessive wear and tear” cost. And there is usually a pre-agreed mileage limit with the contract tool

What Is The Best Type of Loan To Buy a Car?

Are you wondering what type of car loan is best? The best type of car loan for you will ultimately be determined by your situation. If you don't want to worry about the expense of depreciation and don't intend to keep the automobile at the conclusion of the agreement, a PCP agreement sounds just about right for you. 

A Hire Purchase agreement, on the other hand, may be a better alternative if you intend to keep the car when you've paid the loan off and don't want to worry about any mileage limitations or paying for any damage. Hire purchase allows you to change cars more frequently and could also lead to reduced monthly payments

The Bottom Line

When it comes to car finance, there are a few others to take into account. Some you may already be aware of, and some are more relevant to certain types of car loans than others - but it's essential to be aware of these things if you're currently considering car finance. 

For example, you don't have to put down a large deposit to get car financing. You may be eligible to apply for a no-deposit car loan if you match the required qualifying conditions. No-deposit car loans allow you to purchase a new car without making any upfront payments (minus the small reservation some car finance providers will require you to pay).

Need more car finance help? Check out the Carmoola blog! We’re proud to call ourselves car loan experts, and we’ve got tons of resources to help you navigate the complicated but exciting world of car finance. 🚗📖