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.

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.

Car finance – the Hire Purchase

Car finance - how a hire purchase works - The Car ExpertAn 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 les 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.

Car finance – the Personal Contract Purchase

Car finance - how a personal contract purchase works - The Car ExpertA 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 max. 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.  You won’t get any money back, but you won’t have to pay out the remainder.  This means that you have effectively been renting the car for the whole time.

2)   Pay out the remaining amount owed (the GMFV) and keep the car.  Given that this amount could be many thousands of pounds, it is not usually a viable option for most people (which is why they were financing the car in the first place), which usually leads to…

3)   Part-exchange the car for a new (or newer) one.  The dealer will assess your car’s value and take care of the finance payout.  If your car is worth more than the GMFV, you can use the difference (equity) as a deposit on your next car.

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 (or possibly even sooner).  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!

For more detail on PCPs, check out The Car Expert’s latest article about how they work.

Car finance – the Lease Purchase

Car finance - how a lease purchase works - The Car ExpertAn 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 thatyou are aware of the pros and cons of different car finance products to ensure you are making informed decisions about your money.

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

Further reading: Logbook loans

The Car Expert has written a blog about the growth of logbook loans in the UK finance market.  These are monetary loans rather than loans to buy a car, and are a completely different product.  Logbook loans are very high interest loans secured against your current car (which you must own outright) and are pretty much a last resort for anyone needing money but unable to borrow it through normal channels.  Avoid if at all possible.

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Stuart Masson

Stuart Masson is the owner and editor of The Car Expert, a London-based website which provides expert and impartial advice for anyone buying a new or used car, as well as news and information from all over the automotive world.

This Post Has 42 Comments

  1. nadia

    hi we have recently got a car on pcp about 8 weeks old now we did originally agree verbally / on paper to hp but got talked into pcp by a firend who worked in the car business (we’ve always previously had cars on hp) and want to change the finance back to hp but neither the dealership or the finance are helping / giving advice, what is the best way to go onto hp with the least cost . thank you

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  3. Don't want to give lest seen

    I thought V5 now states registered keeper may not be owner of vehicle. This obviously is the case as finance company legally own car until it is paid for. I have been advised I have rights as agreement is between me and the finance company. Is this not true? Surely there is something I can do to take back ownership of the car. My daughter in-law was totally aware I was not gifting her the car. I paid the finance and she paid me. Is there anyway I can get the V5 changed other than with her agreement?

    1. stuart

      Not necessarily. The finance company owns the vehicle in a lease situation, which means they keep the V5 and they are the vehicle keeper. With a PCP or HP, you are the owner – in the same way can own a house with a mortgage on it, but the bank as a listed interested in the house. Chances are the finance company won’t be very happy with you, as you are operating an accommodation deal where you pay for the car and your daughter-in-law pays you (and is the main driver). They don’t allow this, precisely because of the situation you are now in.

      Unfortunately, if you freely signed the car over to her, you are unlikely to have an easy way to get it back again – otherwise, what is the point of signing it over in the first place?

      1. Don't want to give lest seen

        I honestly didn’t know I was doing anything wrong. The car dealers knew I was getting the car for my daughter in-law as I finance a car through them too. I was badgered for months to sign the V5 (I didn’t fill it in) as she said it would make no difference to my owning the car. Naturally no one expected the marriage to end. If I am the owner of the car, and not the finance company (law centre told me finance company own the car), how come she has not committed theft by removing the car I own without my permission? I reiterate registered keeper does not mean you own the vehicle.

        1. stuart

          If you have freely given her the keys and the logbook then you can’t claim it as theft, so the owner vs. keeper debate is largely unimportant. I suggest you read through your paperwork and check with the finance company directly for their advice (note – not the dealer that sold you the car; they simply act as an agent for the finance company). By the sound of it, she clearly had motive for wanting the V5 in her name, but the reasons are all irrelevant now. I’m guessing that you probably don’t have any written agreement with her regarding the use of the vehicle and the payment she is due to make to you, so it is basically your word against hers. Unfortunately, the finance company will be chasing you and not her, so she has very little to lose by not giving the car back.

          1. Don't want to give lest seen

            We agreed she would use car from marital address. I didn’t pass ownership of vehicle over. My daughter and daughter in-law assured me I would never find myself in this situation. and signing V5 was to enable her to get insurance. I cannot believe I have no options legally to get the vehicle back.

          2. Don't want to give lest seen

            Actually I didn’t give her the car keys. She and my daughter picked the car up from the car dealership. Although she was the driver and changed the V5 details she knew I was not giving her the car. Would she have done something wrong if she evidenced on V5 she was the owner of the car? I am just looking for a loop hole. There must be some way round this. Surely to goodness she is only the registered keeper and not the owner of the vehicle. She removed the vehicle from the marital address without my permission, and i would assume hasn’t even informed the DVLA of this. Can I use V62 or V34 form to register car in my name?

        2. andrewtaylor

          Anonymous person, you are either incredibly stupid or lying. if the finance is in your name then how was she able to take delivery and have the v5 changed? you either arranged it or allowed it and now your upset about it. the only person you can blame here is yourself

  4. Don't want to give lest seen

    I took out car finance through a car dealership, and the V5 was registered in my name. My daughter in-law badgered me to change the V5 to her name. She has now left marital home, and taken the car. There is still 24 months finance left. What happens now? I know the finance company own the car. What do I do to get car back?

    1. stuart

      Check through your contract paperwork and contact the finance company. In most finance agreements, you are not supposed to sell the car on while it is on finance. Given that you signed the car over to her, she will now be the registered keeper of the vehicle in the eyes of the law and there’s probably not a lot you can do to get the car back. And since the finance agreement is in your name, if you stop paying for the vehicle then the finance company will be after you, not her. I think you’re probably stuck paying for it unless you can convince her to return it and sign the V5 back over to you, unfortunately.

  5. morag mackenzie

    Do I need to take out vehicle protection insurance which guarantees if my car is stolen etc and the car company Arnold Clark will guarantee any shortfall in price from insurance company. Its been added into a finance agreement/order. I dont think I need it and ive also added 3 yr service and MOT into the 48 mth plan which makes total amount of credit nearly 500 more with 11% APR. I was trying to save on running costs by buying up front.I also part exchanged my car against this used car that should be my deposit, but also wanted £100 deposit which is added onto finance its HP as I keep car at end of 48 mths. I think they have made a mistake. Advice appreciated.

    1. stuart

      Hi Morag,

      No you don’t need to take out these additional insurances. Like any insurance product, you weigh up the cost of the product vs the risk of not being insured. The dealership cannot add these onto the order without your consent and without giving you a full (FCA-compliant) explanation of the products. They also have to confirm your eligibility for the products (not all products are available for all customers). Similarly, you don’t have to sign up to their service and MOT plan unless you feel that it is a good deal – you can get your car serviced anywhere you like.

      The reason they may have wanted an additional £100 deposit from you is because they can’t include the GAP/vehicle protection or any other insurances on the financed amount. Therefore those products have to be paid for in cash (or from your part-exchange), and I’m guessing that your part-exchange valuation doesn’t cover these products.

      From your description, it doesn’t sound like they have made a mistake; it sounds like they are being a bit sneaky…

      1. morag mackenzie

        Yes I think youre right. It was after I went away I thought Id already part exchanged my 7 year old punto which I had paid a lot for to put thru its MOT. That would be classed as my deposit my car but then salesman asked for deposit of £100 for this coming wed and I didnt have that for wed as I had jst paid out 277 on MOT. I had agreed to buy car for this wed at reduced cost of 155 over 47 mths instead of 160 but then they added 100 onto finance making it 157 over 47 mths plus 11% APR..and I didnt think that was right. I did ask for 3 yr service & MOT to be added, but I think ill take it off. I didnt realise I could take car to other garage for service. I tht full service history had to be with the garage that you bought the car from. Id heard it had to be Arnold Clark or fiat dealer stamped. Its a vehicle order agreement. Ive esigned and ive updated my insurance company details yesterday. It does show 100 contributions or deposit paid by customer on the order agreement but 100 more on to total of balance due by finance company.

      2. morag mackenzie

        Sorry meant to add they have included 199 for vehicle replacement Iinsurance and 289 for 3 yr MOT/service on top of car price of 7988 making it 8501 then took px off 2200 then add 100 deposit to finance which was 6201 t 155 x 47 and 1 payment of 455.53 inc typical finance company settlement fee and now 6301 with xtra 100 deposit and 157.53 x47 etc. I still want the car and has updated insurance and esigned can I change my mind about these insurances as nearly 600 is being added onto finance inc the £100 deposit. One more thing can I take warranties out at any garage too, as has 2 mths warranty and full years MOT and r/tax its a Fiat 500 1.2 lounge, 11 plate.

        1. stuart

          Yes you can change your mind about the insurances. Even if you have already signed the insurance contracts (which are separate to the finance contracts), you have 14 days to cancel for a full refund.

          The warranty they are offering is almost certainly a third-party warranty (basically an insurance policy), and you should be able to look online and find the same or similar policies. In the event of making a claim, none of them are as good as a factory warranty, but some are better than others. Not sure which one the dealer would be using.

          1. morag mackenzie

            Thanks for your advice Stuart,

            I contacted Arnold Clark and they have deducted insurances of and £100 deposit they added onto finance.

            However they have emailed revised agreement but the APR is now more. It was 11.4% now its 13% can they legally do this as Im buying same product. I wondered if it was against Consumer Rights Act as they are charging me more.

          2. stuart

            The APR will vary depending on how much money you are borrowing and over how long. The actual fixed interest rate on the money you are borrowing shouldn’t change, but given that you are reducing your borrowing, the APR will be slightly higher.

          3. morag mackenzie

            What is the fixed interest rate is that includerd in your monthly payment. Oh dear Ive asked if I could have same APR rate as it didnt seem right I was paying more for less finance and same product. Thanks for your advice…

          4. stuart

            Fixed interest is the interest you pay on every pound that you are borrowing. APR is the fixed interest plus any fees and charges, and is expressed as an annualised rate (as a fee is paid in one go but interest is paid across the term of the agreement). If you reduce the amount you borrow, the APR should increase slightly even if the fixed interest rate stays the same.

          5. morag mackenzie

            Thanks Stuart. I feel really bad now as I thought they were being sneaky and charging me more. They wont be happy with me, I hope I can still get car. I will apologise but if salesman hadnt adfed £100 onto finance. I wouldnt have had any worries or suspicions. They are also asking (only 30) to be paid for road tax…but I when I asked yesterday about that, was told it was road taxed. I really want the car but think they have made a mistake again.

          6. stuart

            I wouldn’t feel too bad – it sounds like they haven’t been entirely upfront and honest with you (to the standards that they are required to be) anyway!

  6. Tom

    hi, just wondered if you could shed some light on a tricky situation im currently in, with a change of circumstances my Car thats currently on PCP is fast becoming a financial burden and id like to get rid of it, if at all possible.. im about 18-20months into my agreement, can i hand the car back at anytime and walk away? or do i have to pay £2900 to voluntary terminate the contract? i feel thats what i have to do but i wasnt sure if they were just trying to get more money out of me.

    1. stuart

      Hi Tom. You do have termination rights in a PCP agreement, but you will need to check your contract to find out when you can exercise them. In a nutshell, you have to have repaid at least 50% of the total payable (which is not the same as the total borrowed) to be able to give the car back. The finance companies don’t like it, but it is your right. Whether or not you have to pay the additional £2900 to get to the position where you can terminate the agreement will depend on how much you have paid back to date.

    1. stuart

      Hi Tony. You should be able to cancel without affecting your credit history in any way. At what stage of the process are you? If you have ‘signed up for a new car’, does that mean you have signed an order for a car but not signed the formal finance contract? If so, you can simply cancel the vehicle order and then argue with the dealership about getting your deposit refunded. If you have signed your finance contract, you have 14 days from date of delivery to cancel the finance agreement – however, this simply means you will be invoiced for the vehicle, since you still own it if has already been registered.

  7. Gary west

    If I buy a VW the manufacturer and dealer contribute 2,750 to my deposit if I buy with their PCP deal. So what’s to prevent me taking the deal but then after 14 days taking out a bank loan with a lower APR to settle the remaining balance of finance

    1. stuart

      According to the way that most new car contracts are written up by the dealers, there is nothing at all to stop you doing just that. I am yet to see a dealer writing a clause into a contract to say that the deposit contribution is refundable if the finance is cancelled. In theory, they could try and take you to court to reclaim the deposit contribution, but it’s unlikely to ever happen as it’s too much hassle and they would probably lose anyway.

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    1. stuart

      Hi Iain. There is no real reason why it should affect your insurance (since it doesn’t affect the value of the car they are insuring), but if they do ask you if the car is under finance, you will need to tell them. If you don’t, and you later make a claim, they could argue that you misled them and refuse to pay out. It’s unlikely, but then insurance companies tend to operate in their own little universe.

  9. Bradley

    Is it possible to have more than once car finance agreement in my name? I have a PCP for my car and I want to start another one for my girlfriend’s car as she can’t get finance approved, but the dealer said I can’t do that. If I can afford it, why not?

    1. stuart

      What you are asking is for is what is known as an Accommodation Deal, whereby you are financing the car for another person who has been rejected for finance. Finance companies won’t allow it because you are simply trying to circumvent her finance rejection. If they (for whatever reason) will not finance her, then they will not approve someone else to finance a car for her.

    1. stuart

      Depends on the finance company and the finance applicant, but it can be possible to finance with no deposit. Most finance companies will still want to see some deposit from the borrower, however, to approve a loan.

    1. stuart

      It will depend on the particular offers BMW have going, as in many cases you get a ‘deposit contribution’ from the dealer/manufacturer. Ask your BMW retailer, but it may be possible to finance with no deposit at all.

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  12. Bernie T

    Many dealers use multiple finance providers – so the finance terms & conditions may be different for each finance supplier – important to remember if they are giving you quotes from different providers.

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