For so many people in the UK, a car is an absolute essential. Whether you drive to work each day, pick up family members, or whether a car simply represents freedom to you and enables you to explore new places – there’s no shortage of reasons you might need a set of wheels. 

But how do you get a car, affordably? What’s the best option for financing a car purchase, and what are the options available in today’s market? 

In this blog, we’ll unpack the popular car finance options that might be available to you; explaining some of the complex finance terminology and jargon to help you understand your options and choose the best route for you. 

What is Car Finance? 

‘Car Finance’ simply describes the process of funding the purchase of a vehicle by borrowing money. It’s a commonly used practice, which involves you (the borrower) making a financial agreement with a lender (such as a bank or independent finance provider. ThisIsMoney reported that around 2.2 million people took out car finance arrangements in 2022. 

So, what’s all the buzz about? 

For many people, especially during challenging cost-of-living circumstances, paying the up-front cost associated with buying a car outright is simply not possible. So, car finance arrangements exist that allow customers to split the cost of a car between up-front payments and monthly payments over a period that makes the payments affordable. 

Popular Car Finance Options 

Here are some of the car finance options available in today’s market that you may have heard of but might not yet fully understand. 

Hire Purchase 

Hire purchase (HP) is the main financing option in the market. Under a HP you put down a deposit and pay off the cost of the car through monthly instalments. The loan is secured against the car, meaning you don’t own the vehicle until the final payment is made.  

The buyer enters a flexible repayment plan that typically ranges from 2 to 5 years with fixed interest rates – however the longer the term of repayment, the more you will pay in interest.  

As the car is used as collateral for the loan, it may be easier for those with poor credit profiles to secure a hire purchase agreement rather than a personal loan. It’s important to remember that if you fail to make repayments your car may be repossessed.  

A similar product to HP is Conditional Sale which operates in an almost identical way for a consumer. 

PCP Car Finance 

A Personal Contract Purchase agreement is another popular type of car finance. Under a PCP arrangement, you: 

  • Select a car to purchase 
  • Pass the lender’s credit and affordability checks 
  • Agree with the lender on the repayment period (for example 3 years) 
  • Your lender may set an annual mileage limit for the term of finance 
  • Once agreed, you may pay a deposit on your chosen car 
  • You will then repay the loan through a series of monthly repayments that make getting a car much more affordable 
  • At the end of the term, you’ll have the option to: 
    • buy the car for a pre-agreed amount (often called a Balloon Payment) 
    • part-exchange the car 
    • hand the car back to the lender 

One key feature of a typical PCP agreement to be aware of is that you won’t own the car at the end of the repayment term unless you choose to pay the larger final repayment – this is often referred to as a Balloon Payment.  

Personal Loans 

Personal loans may be available from your car dealer or broker or you may choose to source one from your own bank or other lender.  The upside of the latter is that you might get interest at a cheaper rate on the loan than on a car finance agreement itself. However, there is absolutely no guarantee of this – and many loan providers may require that you explain why you are taking out the loan when making their risk assessments. 

Additionally, if a loan does not cover the entire cost of your desired vehicle, you may need to find a sizeable deposit. 

Which Car Financing Model is Right for Me? 

Exactly which car finance model you should choose primarily depends on your starting point. If you have a large amount of money saved up and are ready to invest into buying a car, it could be worth asking around to find out what the best deals are available from different finance providers – and how much you would need to repay if you were to take out a finance agreement. 

More initial money may mean that you’re likely to get access to cheaper interest rates, so either a loan or a monthly repayment agreement could work well for you – be sure to check out your options. 

If you don’t have the initial capital to hand, a car financing agreement could be the best option for you. Under one of these agreements, you could arrive at a monthly repayment number that perfectly fits your budget and know exactly how long you’ll be repaying for. 

How Does Credit and Interest Impact My Decision? 

Lenders, such as banks, ultimately want to reduce the amount of risk they take by lending you money. Because of this, your credit profile can impact the interest rates you get access to, and a weaker credit profile may mean lenders will likely charge you more interest to offset the additional risk they see. Read our insights around applying for car finance with poor credit for more information. 

It’s important also to understand how the interest rate on your finance agreement is calculated. Language to be aware of includes ‘fixed’ interest, i.e. it cannot change throughout the agreement, versus ‘variable’ interest which might involve the interest rates fluctuating based on external factors such as the economy. Variable interest rates mean that your monthly repayments could go up or down with little warning. 

Lenders have a duty to help you understand the type of finance you’re signing up for, so be sure to take the time to ask any questions you might have to make an informed decision.

How UCan Could Help 

At UCan, we specialise in helping people get access to car finance that could make their dream car a reality. Stocking a variety of cars from the best-known manufacturers, we supply everything from saloons and SUVs to hatchbacks and coupes. 

The process of applying for car finance through us is simple, just start your application and our friendly experts will take you through the application process over the phone.