Car finance: What you should know

Car finance advice
Car finance is how most people buy their vehicle

Car finance has become big business. A huge number of new and used car buyers in the UK are making their vehicle purchase on finance of some sort. It might be in the form of a bank loan, finance from the dealership, leasing, credit card, the trusty ‘Bank of Mum & Dad’, or myriad other forms of finance, but relatively few people actually buy a car with their own cash anymore.

A generation ago, a private car buyer with, say, £8,000 cash to spend would usually have bought a car up to the value of £8,000. Today, that same £8,000 is more likely to be used as a deposit on a car which could be worth many tens of thousands, followed by up to five years of monthly payments.

With various manufacturers and dealers claiming that anywhere between 50% and 95% of car purchases are today being made on finance of some sort, it is not surprising that there are lots of people jumping on the car finance bandwagon to profit from buyers’ desires to have the newest, flashiest car available within their monthly cashflow limits.

The appeal of financing a car is very straightforward; you can buy a car which costs a lot more than you can afford up-front, but can (hopefully) manage in small monthly chunks of cash over a period of time. The problem with car finance is that many buyers don’t realise that they usually end up paying far more than the face value of the car, and they don’t read the fine print of car finance agreements to understand the implications of what they’re signing up for.

For clarification, The Car Expert is neither pro- or anti-finance when buying a car. What you must be wary of, however, are the full implications of financing a car – not just when you buy the car, but over the full term of the finance and even afterwards. The industry is heavily regulated by the FCA (Financial Conduct Authority, formerly the Financial Services Authority), but the FCA can’t make you read documents carefully or force you to make prudent car finance decisions.

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Car finance – financing through the dealership

For many people, financing the car through the dealership where you are buying the car is very convenient. There are also often national offers and programs which can make financing the car through the dealer an attractive option.

This blog will focus on the two main types of car finance offered by car dealers for private car buyers: the Hire Purchase (HP) and the Personal Contract Purchase (PCP), with a brief mention of a third, the Lease Purchase (LP). Leasing contracts will be discussed in another blog coming soon.

Hire Purchase (HP)

Car finance - how a hire purchase works - The Car Expert

A hire purchase (HP) is quite like a mortgage on your house; you pay a deposit up-front and then pay the rest off over an agreed period (usually 18-60 months). Once you have made your final payment, the car is officially yours. This is the way that car finance has operated for many years, but is now starting to lose favour against the PCP option below.

There are several benefits to a Hire Purchase. It is simple to understand (deposit plus a number of fixed monthly payments), and the buyer can choose the deposit and the term (number of payments) to suit their needs. You can choose a term of up to five years (60 months), which is longer than most other finance options. You can usually cancel the agreement at any time if your circumstances change without massive penalties (although the amount owing may be more than your car is worth early on in the agreement term). Usually you will end up paying less in total with an HP than a PCP if you plan to keep the car after the finance is paid off.

The main disadvantage of an HP compared to a PCP is higher monthly payments, meaning the value of the car you can usually afford is less.

An HP is usually best for buyers who; plan to keep their cars for a long time (ie – longer than the finance term), have a large deposit, or want a simple car finance plan with no sting in the tail at the end of the agreement.

Read this: Car finance – the hire purchase (HP) explained

Personal Contract Purchase (PCP)

Car finance - how a PCP personal contract purchase works - The Car Expert

A PCP is often given other names by manufacturer finance companies (eg – BMW Select, Volkswagen Solutions, Toyota Access, etc.), and is very popular but more complicated than an HP. Most new car finance offers advertised these days are PCPs, and usually a dealer will try and push you towards a PCP over an HP because it is more likely to be better for them.

Like the HP above, you pay a deposit and have monthly payments over a term.  However, the monthly payments are lower and/or the term is shorter (usually a maximum of 48 months), because you are not paying off the whole car.  At the end of the term, there is still a large chunk of the finance unpaid.  This is usually called a GMFV (guaranteed minimum future value). The car finance company guarantees that, within certain conditions, the car will be worth at least as much as the remaining finance owed. This gives you three options:
1)   Give the car back.
2)   Pay out the remaining amount owed (the GMFV) and keep the car.
3)   Part-exchange the car for a new (or newer) one.

The PCP is best suited for people who want a new or near-new car and fully intend to change it at the end of the agreement. For a private buyer, it usually works out cheaper than a lease or contract hire finance product. You are not tied into going back to the same manufacturer or dealership for your next car, as any dealer can pay out the finance for your car and conclude the agreement on your behalf. It is also good for buyers who want a more expensive car with a lower cashflow than is usually possible with an HP.

The disadvantage of a PCP is that it tends to lock you into a cycle of changing your car every few years to avoid a large payout at the end of the agreement (the GMFV).  Borrowing money to pay out the GMFV and keep the car usually gives you a monthly payment that is very little cheaper than starting again on a new PCP with a new car, so it nearly always sways the owner into replacing it with another car. For this reason, manufacturers and dealers love PCPs because it keeps you coming back every 3 years rather than keeping your car for 5-10 years.

Read this: Car finance – the personal contract purchase (PCP) explained

Lease Purchase (LP)

Car finance - how a lease purchase works - The Car Expert

An LP is a bit of a hybrid between an HP and a PCP. You have a deposit and low monthly payments like a PCP, with a large final payment at the end of the agreement. However, unlike a PCP, this final payment (often called a balloon) is not guaranteed.  This means that if your car is worth less than the amount owing and you want to sell/part-exchange it, you would have to pay out any difference (called negative equity) before even thinking about paying a deposit on your next car.

Read the fine print

What is absolutely essential for anyone buying a car on finance is to read the contract and consider it carefully before signing anything. Plenty of people make the mistake of buying a car on finance and then end up being unable to make their monthly payments. Given that your finance period may last for the next five years, it is critical that you carefully consider what may happen in your life over those next five years. Many heavily-financed sports cars have had to be returned, often with serious financial consequences for the owners, because of unexpected pregnancies!

Always ensure you understand the various finance options being presented to you, and that you are aware of the pros and cons of different car finance products to ensure you are making informed decisions about your money.

Further reading: Before you apply for car finance

Disclaimer
Most car finance agreements in the UK are regulated by the Financial Conduct Authority, and anyone involved in the selling of car finance must be accredited by the FCA. You should always consider the terms and conditions of any agreement carefully before taking out any form of car finance, as you are making a substantial ongoing commitment and there may be significant costs if you change your mind or are unable to meet your commitments at a later date.

*HP, PCP and LP car finance images courtesy Evans Halshaw.

Stuart Masson
Stuart is the Editor of The Car Expert, which he founded in 2011, and our new sister site The Van Expert. Originally from Australia, Stuart has had a passion for cars and the car industry for over thirty years. He spent a decade in automotive retail, and now works tirelessly to help car buyers by providing independent and impartial advice.

149 Comments

  1. Stuart Masson

    Hi Dave. Not usually – most car finance products are secured against the vehicle, so it can’t be transferred to another car. Contact the finance company, because it will depend on the type of finance product you have, but I would be surprised if you are able to transfer it.

  2. Hi I have a Fiat 500 on a 3 yr PCP deal, I put down 2,800 deposit so monthly payments are £59 I’m nearly 2 years in, and struggling financially and thinking of going carless.
    My dad has offered to have the car transferred to his name and pay the remainder of the payments, would the finance company do this??
    Thanks

  3. Stuart Masson

    Hi Michelle. You have to remain the registered keeper and main driver of the vehicle (it is a condition of your finance agreement, and cannot be transferred to anyone else).

    You would have to settle the finance by selling the car to your dad, so he would have to pay the entire balance outstanding in one go rather than in instalments. It would also mean that he is buying the car outright rather than paying off the last year of the finance agreement and then giving the car back.

    If he doesn’t have the cash available to do so, he could take out a personal loan from a bank to pay off the car finance, and then repay the bank. However, the monthly payments would be higher than your current PCP payments.

  4. Hi, we put down a £200 deposit for a new Kia Picanto (rest to be paid with trade-in on delivery) , however the finance proposal was then declined, the dealer only telling me this 4 weeks later and 2 days before suggested delivery date. Anyway I have been asking for the £200 back and the dealer is refusing to do so, as far as I am concerned the contract etc is void and the money should be returned, any thoughts would be much appreciated as not sure where we stand before I take it any further.

  5. Stuart Masson

    Hi JC. Yes, the dealer should be refunding the deposit if the finance was declined so I’m not sure what their problem is. For some useful information on how to go about getting it back, have a read of our latest article on resolving a dispute with a dealer.

  6. Many thanks Stuart, I will have a look at that info.

  7. Hello, we bought a car on finance from Arnold clark in September but we are now expecting another baby so would like to get something bigger. Is it possible to do this?

    thanks

  8. Hi Stuart, I’ve been offered hire purchase finance on a pre reg 2016 ds3 £14495. The deal is £6000 part x +£2000 deposit + 48 monthly instalments of £153.18. If I take out 48 monthly instalments of £153.18 I will get £500 dealer deposit contribution as well. The apr is 10.9% on the loan amount. Is this an ok deal? Thx.

  9. Stuart Masson

    Hi Dave. We can’t comment on the merits of a particular deal or offer. What you need to look at is how much you are going to be paying overall to finance the car relative to its original price of £14,495 and decide whether you think it is worth it. Have a read of our article about the details of hire purchases.

  10. Stuart Masson

    Hi Laura. You can probably change your car now, but it will mean settling your existing finance and starting a new one, and is likely to be a very expensive process since you have only had the car for six months. Have a read of our article about settling your car finance early.

  11. HI Stuart, I’m currently just looking for some advice on a car which i currently have on PCP. I have just over a year left on the agreement, with a lovely £4000 payment left at the end if I wish to own it. When I took the agreement out my original plan was to hand the car back at the end. However as you can imagine circumstances change and due to my boyfriend (the user of the car) and myself having to live separately for a while, i changed the registered keeper on the V5C to him as he was having trouble with keeping the insurance down. we are now living together and basically I was wondering if i would have a problem with taking the car back to the dealer at the end? would i have to pay the full £4000 balloon payment to own the car or pay a certain amount, as i am aware this could change the value of the car. What are my best options? Thanks for the help in advance.

  12. Stuart Masson

    Hi Charlotte. If you want to own the car at the end, you will always have to fork out the final £4,000. The real value of the car is irrelevant if you are buying it, as the £4,000 is simply the amount remaining to settle the finance.

    If you want to give the car back, you should probably be OK. There may be an issue with the car now being in your boyfriend’d name, so you may get some financial penalty (as the car has another owner, and you are not supposed to change the registered keeper while it is under finance).

  13. Hi, can all hire purchase agreements be settled early? If settled early, do I have to still pay the interest on the remaining credit?

  14. Stuart Masson

    Hi Jon. When you settle your hire purchase early, you will save on the interest you would have otherwise paid over the remainder of the agreement. For more information, have a read of our article on settling your finance early.

  15. Can I get some advise plz I’ve got a car on finance I’ve had it 6 weeks but had nothing but problems it’s still under warranty but the garage are refusing to fix it. I want to return the car and cancel the finance as the car no longer works is it possible for the finance to be canceled and return the car and get my deposit back?

  16. Hello, please help me.

    I went to a car dealership on Saturday 30 April 2016 to view a car I had seen online, paid deposit and signed a finance contract with a view to returning next weekend to collect the car. On getting back home, I changed my mind concerning some add ons which racked up the price by around £800 (warranty, etc.). The next day, Sunday 01 May 2016, I asked the sales officer to send me the warranty document so I can digest the information. Today Monday 2 May 2016, I decided I don’t want the add ons, and asked that the extra £800 be taken off. He says because the finance had already been approved and money transferred to the dealership, I’ll have to apply for another finance and would have to charges. I though they could simply amend the figures or at worst pay back the difference of £800 I’m asking them to remove from the deal, that way, I don’t have to reapply as repeated applications would negatively affect my credit file.

    Any suggestions.

  17. Stuart Masson

    You can’t simply cancel the finance. You will need to work with the finance company as the car belongs to them, not to you. You are still within six months of purchase, so you should be able to insist that any faults are repaired. If they are not repaired adequately, you would have the right to reject the car – however, it needs to be done in conjunction with the finance company.

  18. Stuart Masson

    Hi Patsey. They are simply being difficult. Of course you can choose not to take the extras, but the dealer won’t want you to because it will reduce their commission. This kind of selling really annoys me, and it happens all the time.

    The extended warranty should have a 14-day cooling-off period anyway (check the warranty document), so you could cancel it afterwards if necessary.

    It is unlikely that they have already been paid by the finance company if you are not collecting the car until next weekend. You can check this by calling the finance company direct and asking them. The finance company is also unlikely to care if you reduce your deposit by £800 and still finance the same amount as originally applied for (unless it drops your total deposit below a minimum threshold). You are highly unlikely to need to reapply for finance if they are amending the numbers in a fairly minor way – which happens quite often as customers add or subtract extras from their orders all the time.

    Put it this way – if you were adding £800 of extras, the dealer would be bending over backwards to make it easy…

  19. Hi Stuart,

    Many thanks for attending to my post. After posting last night, I emailed this morning to say rather than returning the money already paid to them and reapplying for a new finance, why not simply return any difference given that early repayment/settlement is allowed under the finance’s T&C. The dealership got back to me to say rather than amend the documents, they would transfer the excess accruing from add ons into my bank account so I can make the early repayment by myself. Unfortunately, that means my monthly repayment and loan term remain the same. If they amended the contract, over same loan term, I should be making a slighter lower monthly payment. It would appear they are being unnecessarily difficult. Although I accepted this latest arrangement, I am now thinking I should insist they amend/modify the finance document to reflect the true position of things.

  20. Stuart Masson

    If you are wanting to maintain your original deposit and reduce the amount financed by £800, that would definitely involve resubmitting the finance application and creating a new contract. It’s unlikely that it would affect your credit score, as it is simply amending an agreement which has already been approved. The dealer will almost always choose the path of least work required, and they will probably try and convince you to take the add-on products once again when you go back in to collect the car.

    If you really want them to redo the finance docs, you will need to do it before the finance agreement is activated and paid out.

  21. Hi I’m seeking advice for my sister, her ex partner wanted a new car he tried for finance and got rejected, the advisor on the phone asked if he could get a friend or family member to apply instead, he asked my sister and promised to pay every month!! My sister spoke to the finance company and explained she won’t be driving the car, yet they passed her for credit, he keeps defaulting on payments, which is landing my sister into a lot of difficulty as she already has hp on her own car, is it right for a finance company to ask a friend to get the loan and where does she stand in getting out of this agreement.

  22. Stuart Masson

    Hi Emz. No, they absolutely should not be doing this, as it constitutes an accommodation deal and the finance company wouldn’t normally allow it. It’s not uncommon for dealers to try and suggest this sort of behaviour, but highly unusual for a finance company representative to suggest it.

    For more information, have a read of our article about taking out finance for another person.

  23. Hi i recently recieved my new car on PCP on 6th April 2016 and for some reason the dealership had me sign the finance agreement back in febuary way before i even got my car and so ive had to make the monthly payments before i even got my car and then one shortly after getting my car. Have i been done over here because if i had signed the finance agreement as soon as the car got signed over to me i would have not had to pay anything till may.

  24. Stuart Masson

    It’s not necessarily unusual to sign the agreement weeks in advance, especially if it allows you to benefit from a limited-time offer. However, it is not correct for the contract to be activated (which means the finance company pays the dealer) and then you start making your monthly payments if you don’t have the car. For the contract to be activated, the car needs to be registered and teh warranty would have started, which means your warranty and road tax would have commenced in February – and you will presumably have an ‘old’ 65 number plate rather than a ‘new’ 16 plate.

  25. Hi can you please confirm if this PCP agreement has gone through fully please?
    It has a agreement number, decision as accepted and a proposal ID.

    Does this mean it’s all sorted and I’m 100% ok to collect the car when it’s in please?

  26. Stuart Masson

    Hi Beth. It sounds like it has been approved, although that doesn’t necessarily mean that the finance company has paid the dealer for the car yet. You should be able to call the finance company and ask them if it has been activated.

  27. Could I go to finance company of my choice get accepted and then go to a second hand dealer and buy the car off him using the finance company I have chosen is that possible?

  28. Stuart Masson

    Hi Domone. In theory, yes. However, if you are looking for a HP or PCP, most finance companies work through the dealerships (so the dealer is acting as an agent for the finance company). Because the finance is secured against the vehicle in a PCP or HP, the vehicle details are part of the loan application and approval process.

    If you are looking at a personal loan from a bank, then yes you can absolutely get your finance in place and then go to buy a car wherever you like.

  29. Hi Stuart – sorry to bother you – my question relates to consumer credit advertising – particularly to car adverts which include / broker finance services.
    Under CONC 3.5.3 R(1a) where a financial promotion indicates a rate of interest or an amount relating to the cost of credit whether expressed as a sum of money or a proportion of a specified amount, the financial promotion must also: include a representative example in accordance with CONC 3.5.5 R.
    CONC 3.5.4 G(1) then explains that a rate of interest would also include reference to 0% credit.
    Some of the car brand / industry guidance are saying that a rep. example is not needed for a monthly payment where the Representative APR is 0%. It is also sometimes described as 0% APR (not as a Representative offer).
    They reason 0% APR includes no cost of credit – what about CONC 3.5.4 G(1)? Is 0% Rep. APR offer not regarded as cost of credit then?

    In such 0% Rep. APR cases – where rep. example isn’t supposedly required – they then say that the following information should be included with the monthly payment: the term,
    deposit and optional final payment (if PCP) – Q: What is the basis for this? Has there been an FCA decision on this? Here is an example of such guidance (albeit not binding) see bottom of p. 7 and 8: http://www.hyundaicapital.co.uk/wp-content/uploads/2014/07/HMF-Financial-Promotions-Guidelines.pdf?0216a

    Just wonder if you can help shed some light on this? Hope you can point me in the right direction and explain where they are getting this from? If time – they also say that a min deposit should always be quoted in main copy body if it is over 10% – where is the legal basis for this if any?

  30. Stuart Masson

    Hi Tim. Not really in my area of expertise. You would be better off asking the FCA about their requirements, and then the relevant ombudsman if you feel you’re not getting anywhere.

  31. Thanks Stuart – will do that. FCA said they couldn’t provide any help as to interpretation of the FCA Handbook.

  32. Hi Stuart
    I took a car on loan and after 2 days within the cooling off period I called the finance company and the dealer to explain that the car had a major gear box issues. It took them 4 months to sort out the issues. They eventually sent a third party mechanic and he confirmed the problem.

    However within the cooling off period I called Santander and cancelled the agreement. They tried to charge me 400 pounds for Returning the car from London to Manchester to which I refused.
    after few e-mails back and forth, they accept to pay the bill.

    They have collected the car since but now we have tried to apply for another finance but it still shows that I have finance with Santander on that car.

    How long will take before they remove my name on their database so I can apply for a finance as we don’t have a family car?

    Is the car dealer under any legal obligation to return my deposit as we part exchanged our family car?

    What steps to follow in case they refuse to reimburse?

    Oliver

  33. Stuart Masson

    Hi Oliver. You will need to call Santander and – if necessary – keep bugging them until they update the credit agency with the correct details.

    As for refunding your deposit, it will depend on how it was all resolved, what sort of contract you had and therefore what your legal rights are. You said that the car was collected by Santander after you cancelled the agreement. This implies that it was not on a PCP or Hire Purchase, as they would have simply invoiced you for the finance amount and you would have had to deal with the dealer to reject the car. Was it on a contract hire (lease) agreement?

    Trying to claim a refund more than four months after the event is always going to be difficult, so you will probably have a fight on your hands and you may need to engage a law firm to act for you if you want too see your money again.

  34. Hi I’ve been accepted for finance at a dealership! Would I get approval at other dealerships aswell if I wanted to shop around? The dealership I have been approved with obviously has done a credit check!

  35. Stuart Masson

    Hi Katrina. You should do your shopping around before you apply for finance. Every time a finance company takes an application from you (regardless of whether they approve or decline you), it affects your credit rating by a small amount. It also looks to other finance companies like you have been declined and are looking around to try and get approved somewhere else, which makes them less likely to approve you.

  36. hi,
    i was wondering if you could help me with some legal advice? having recently got myself into financial difficulty which has resulted in having my car repossessed, with me not being in a position to pay the full outstanding amount, it was agreed that the car would be sold, however i have just found out that the car was sold, for a price lower than what was owed meaning that i owe X amount, would you be able to tell me if the finance company should have told me when and where the car was being sold so that i could view the auction and possibly even buy the car back, i have read that this is the case not sure if this is true though?

  37. Stuart Masson

    Hi Chris. If you want legal advice, you will need to speak to a lawyer. I am not a lawyer, and even a lawyer is not going to offer specific legal advice on an open forum with a minimum of information. You can try legalbeagles.info, which is a consumer legal advice forum, but even then you will only really get general advice rather than specific advice for your circumstances.

  38. Hi Stuart,

    I have had my car in HP for almost two years. This evening sat down with my statement so I could work out how much I had paid as I am thinking of selling the car.

    Firstly I noticed that the Reg no on the statement isn’t correct. It is for a car 4 yeas newer than mine. I looked back through my emails to see what the reg no was in those and noticed that the agreement no is also different from the agreement no I signed.

    So does this mean my contract is void? I am wondering if it is void. I could give them back the car and owe them nothing.

  39. Stuart Masson

    Hi Jillie. It probably doesn’t mean your agreement is void, and the fact that you have been happily paying each month for the last two years means you can’t really turn around and walk away.

    Give the finance company a call and find out what has happened. Clearly you have been given the wrong documents at some stage, but this is something that you should have noticed at the time rather than two years later. The finance company should be able to issue you with a copy of the correct documents easily enough.

  40. Hi Stuart

    I have just put down a deposit on a used car and signed the agreement. I have recently got a call from the garage stating they put my part exchange through twice by accident. This now means my monthly costs will go up. Do the garage need to stick with the original signed deal.

  41. Stuart Masson

    You will need to look at the contracts closely to see what has been written where. You can try and stick to your guns, but if it is a significant amount of money then the dealer will simply cancel the deal altogether.

  42. Hiya. I have finance on my car and I a working away for the next 10months. Can I sorn the car whilst it’s on finance? and ……cancel the insurance? or must insurance be in place if there’s finance on it. Thanks

  43. Stuart Masson

    Hi Louisa. You must have the car insured at all times. Whether or not the finance company and insurance company are happy for you to SORN the car is up to them; in theory it shouldn’t be a problem, but check your contract and talk to the finance company about it. And check with your insurer to make sure it won’t affect your premium or your no-claims bonus accumulation.

  44. My daughter part exchanged my car on HP without my permission. She is still in the cooling off period can she get out of the contract. I have been reading about nemodat?

  45. Stuart Masson

    Hi Elena. You should probably get professional legal advice on the matter, or at least start by going to legalbeagles.info for some initial advice. You should also contact both the dealer and the finance company to explain that it was not her car to sell – and that assumes you have the V5C logbook to prove it.

  46. Hi Stuart,

    I have a quick question, I purchased a Volkswagen Polo and signed the finance agreement yesterday, but only realised when I came home and read it properly that I signed the hire purchase agreement. I have not paid the full deposit yet. I wanted to go for the PCP plan, as I wanted to part exchange the car after 3 years. My HP plan is for 4 years and I signed the contract yesterday. But is it still possible to change the plan to PCP or do I have to pay any fees for it?

  47. Stuart Masson

    A PCP is a form of hire purchase, so the finance contract should say hire purchase. If there is a guaranteed future value payment (may be called a balloon payment, or an optional final payment) and an explanation of how to return the car at the end of the agreement, then it will be a PCP.

    However, if you were expecting a three-year agreement instead of a four-year agreement then you should go back and cancel it. You have 14 days to cancel the finance agreement without incurring any costs, however this does not cancel the vehicle purchase.

  48. Hi Stuart. I have recently applied for a Kia Procee’d through PCP in Arnold Clarke and was approved. This was in September. However, the garage has been in touch to advise it will not be delivered until the end of November. When the car arrives, do they have to re apply for finance or will my previous accept still be valid?

  49. Stuart Masson

    If nothing has changed in your situation or the car’s pricing/finance plan structure, the finance company probably won’t run another assessment. If anything significant changes (you have a new job or the amount being borrowed increases, for example), they may conduct another assessment.

    When you sign your finance contract, you will be declaring that everything you have told the finance company is correct – so if anything has changed since the application, you will be obliged to inform the company.

What are your thoughts? Let us know below.

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