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Different types of car finance? Which is best for buying used cars?

Car with outstanding finance

We all wish it would have been this easy, right? Being able to afford a car is not everyone’s cup of tea. Buying a car is one of the major investments that one makes. This is where car finance comes into play. Car finance helps you pay the money required for the car which otherwise would have been difficult for you to afford.

But if you are wondering how and where to start? Or unable to decide what type of car finance to choose then bear with us till the end for some important insights. 

This guide covers everything you need to know about car finance deals. From how car finances work to various types of car finances, the pros and cons of each and the tips to choose the right one that suits you in every manner. We are sure this guide will help you know what type of car finance would be best for buying a used car. So wait no more and read on.

How does car finance work?

When buying a car with the entire cash payment is not possible, one can always use car finance wherein the borrower can pay the whole amount in regular monthly payments within the given period. 

There are various types of car finance that one can choose depending upon different factors such as the total amount borrowed, the intention to keep the car, etc.

With all these available options, you can find out how to get a car with no money and enjoy your ride. But first, check the financial opportunities and then choose the convenient method to pay for your vehicle.

Types of car finance

If you are planning to buy a car on finance then there are numerous options of which top ones are as given below:

  • Hire purchase (HP)
  • Personal contract purchase (PCP)
  • Personal loans.

Let’s take a detailed look at each type of car finances below:

HP car finance:

Hire purchases are the most common type of car finance used in the UK. Here the car buyer borrows money from the lender by securing the loan against the vehicle. The borrower will not be able to own the car until the entire amount is paid back to the lender. 

With a hire purchase agreement, you have the option to decide how you want to pay off the amount. It can be either by paying a deposit amount in advance and then paying the outstanding amount monthly. Or you can also choose to pay the remaining amount by asking the lender for the settlement finance.

Advantages of using the HP car finance: 

  • No limitations on mileage.
  • Regular monthly payment makes it easy for the borrower.
  • Voluntary termination is possible i.e. returning the car after paying half of the borrowed amount.
  • Allows you to negotiate better while buying the vehicle as you receive the entire amount in advance.

Disadvantages of using HP car finance:

  • Monthly instalments can be higher than other types of car finances.
  • A delay in paying the monthly instalments can negatively affect your credit score.
  • If ever unable to pay the borrowed amount can lead to vehicle repossession by the moneylender.

Compare and find the best car finance deals!

Need car finance? Compare and get the best deals with us. Apply now for a pre-approved Hire purchase loan & drive away the vehicle.

PCP car finance:

Personal contract purchase agreement resembles that of HP finance agreement. Here too the car buyer can pay the borrowed amount with an initial deposit and consequently by paying the monthly instalment for a given time. Nevertheless, in PCP car finance, to own the car, you will have to pay the balloon payment a.k.a Guaranteed Minimum Future Value (GMFV). Otherwise, you can return the car to the lender or use the equity to buy a new one.

Advantages of using the PCP car finance :

  • Monthly instalments are lesser than the other types of car finances.
  • You get flexible options, hence it is the  most favourable type of car finance in the UK.
  • The regular monthly payments are fixed making it easier for the borrower.
  • Allows you to negotiate the price of the car with the seller while buying as you receive the entire amount in advance.
  • This is the best option to own the latest car model for a short period.

Disadvantages of using PCP car finance:

  • There is a limitation on mileage (Annually)
  • If you exceed the mileage limitation or caused any damage to the car then there will be charges applied while returning it.
  • If you wish to own a car in the end, then this is an expensive deal.

Personal loans:

In this type of car finance, you can borrow the amount from the finance company for a stipulated period. This is an unsecured loan which means the money is not lent against the car. Hence the borrower can sell the car sans any consent from the finance company.

Advantages of using the personal loans:

  • This is the simplest form of car finance deal.
  • Easy to arrange which can be done via online, phone or face to face at the company.
  • You are flexible to finance the entire price of the car or on a part of it.
  • Having a good credit score can help you get the best deals.

Disadvantages of using personal loans:

  • The finance company may not provide you with the loan if you have a poor credit history
  • There is a limit on the maximum amount of loan one can receive i.e. £25,000.
  • At times, you may need to wait for the funds to be available.

Do you have a poor credit score? Wondering what to do next?

Suppose if you have a poor credit score, then you can opt for guarantor loans. Here there is a third party involved who can be your friend or any family member. This third party will act as a guarantor who will be liable to pay the remaining amount if ever you are unable to pay up. This is the best deal for people who are unable to get a car finance deal due to various other factors including poor credit scores.

Here are some points to keep in mind when you compare to find the best type of car finances:

  • Analyse yourself whether you can pay the monthly instalment.
  • You must also be able to afford the other expenses such as insurance and maintenance.
  • Make sure to read all the terms and conditions. If you do not understand any terms, then clear them out right away with your providers. They must be happy to explain, if not then stay away from such deals.
  • Be upfront with them in asking about the options you get if you ever are not able to pay the monthly instalments.


Planning to buy a car on finance? Compare the car finance deals with us and get the best suits your monthly instalments budget even if you have bad credit.