How Does Car Finance Work in the UK?

Car financing is what many call a necessary evil. Part of you tells you not to go for it and then the other tells you to go for it and in most cases the later wins. But “How Does Car Finance work in the UK?”.

What percentage of Brits have car finance? Find answers to these questions and more in this article as I explain how Car financing works in the United Kingdom.

As is the case in most developed and even developing countries, car finance is widely used by car owners to buy their dream car. In 2018, Brits purchased cars/vehicles through car loans totalling over 2.4 million cars with majority opting for used cars as against brand new.

Eligibility Requirements

Generally these are some of the requirements you must meet to qualify for car finance in the UK.

  • Applicant must be 18 years and above
  • Permanent resident of the UK
  • Must have a secured job
  • Steady income

READ ALSO: How To Settle Car Finance

How Car Financing Works in the UK 

Before you consider financing your car, you must first understand how it works here in the UK so you don’t commit yourself into something you don’t know much about. This is because by putting your signature on those dotted lines, you have entered into an agreement that is binding on you till the end of the loan term.

Here in the UK, the three most commonest ways by which you can finance your car is either through Hire Purchase(HP), Personal Contract Purchase(PCP) or Car Loans and I’m going to explain to you how each of them works.

Personal Contract Purchase (PCP)

The Personal Contract Purchase is one of the common names you hear when it comes to car finance in the UK. PCP is similar to hire purchase except that with Personal Contract Purchase, the monthly payments you make is lower throughout the course of the loan term and then you make a balloon payment at the end. Note also that you will be required to make an initial deposit of at least 10% of the car value.

What it means is that the monthly payments you make isn’t calculated to cover the cost of the loan. So that you make the balloon payment at the end which is usually lower than the value of the car at the time you will be making payment.

You get to own and drive the car from day 1. However, the lender may repossess the car if you fail to make payments as agreed. Once you make the balloon payment, the title to the car is changed to your name.

Personal Contract Purchase is normally offered by auto finance and Car dealerships.

Hire Purchase (HP)

Hire Purchase is also another way of financing your car offered by auto finance companies, credit dealerships and car supermarkets. It is a bit more straightforward and easier to understand than PCP.

With Hire Purchase, you are not necessarily required to make any deposit, although a deposit will help to reduce your monthly payments. You pay a fixed amount in monthly installments till the loan matures without making any balloon payment at the end.

However, monthly payments are higher with Hire Purchase than PCP and you only get to own the car after making the last payment. Hire Purchase also has no limits on the mileage you are supposed to do each year and you’re likely to qualify for HP even with a bad credit.

Personal Loans 

Personal loans puts you in a better position to bargain for a good deal from the car dealership. Because then you have the cash on you hence is making a cash purchase which usually comes at better rates than the other finance options.

So if you’re looking for a way to finance your car, you might as well consider going for a personal loan from either a bank or credit unions etc. If your personal loan application is approved, you will be given the lump sum amount you requested for, interest will then be worked against it and fixed monthly payments will be spread across the loan term.

You have alot of options as to where you can get a personal loan to finance your car. The car becomes you own from the very day you purchase the car and can do with it as you please without any limitations.

READ ALSO: How Does A Balloon Car Loan Work


Who wouldn’t want to own a car? Owning your own car is good. But the fact that you seriously wish to own a car shouldn’t make you rush into signing any agreement you know little or nothing about.

Explore your options! Understand the terms and conditions of each finance option before appending your signature on the loan agreement. Bear in mind that all of these methods of financing your car have their own merits and demerits hence which ever option you choose should mean that you’re convinced it is best for you.


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