In this guide
If you’re looking for a way to finance a new set of wheels, you’ll have several options at your disposal. We explain how each of these options work, and which ones might suit you.
Following a period of heightened interest rates, many drivers put their plans to finance their vehicles on ice last year. Data from the Finance & Leasing Association (FLA), a trade association, showed that consumer car finance new business volumes fell in November 2023 by 7% compared with the same month in 2022.
However, with inflation easing and an increasing number of vehicles entering the market, Mark Attwell, Director at AA Car Finance, said demand for car finance could be on the rise this year.
“With more makes and models to choose from, drivers who were waiting for their perfect car may find now is a good time to commit to a purchase,” he said.
If you’re looking for a way to finance your vehicle, we’ve explained the options available. This includes:
- What is car finance?
- How does car finance work?
- What types of car finance are there?
- What is the best way to finance a car?
Read more: Who can claim car finance compensation?
What is car finance?
Many people can’t afford to buy a car outright.
The Vauxhall Astra, which is one of the UK’s most popular vehicles according to the DVLA, can cost anywhere between £27,000 and £42,000. It’s a figure which could exceed the average UK salary or at the very least represent a large portion of it.
That’s why lenders and dealerships offer drivers finance, so they can pay back this sum in instalments.
Read more: How to buy a Porsche on finance
How does car finance work?
The structure of your finance will depend on what type of agreement you’ve entered. This is explained in more detail below, but the size of your repayment relies on the value of your vehicle, the length of your repayment plan, and the interest charged.
In some cases, car finance can be approved on the spot. In other cases, it can take a few days because the lender needs to carry out affordability checks.
Read more: Car hire traps that could cost you hundreds on holiday
Can I claim compensation for car finance?
After receiving a number of complaints from customers saying they’ve been overcharged on their car finance agreements, the Financial Conduct Authority (FCA) said it is conducting an investigation of the industry. This means if you paid for a vehicle with car finance prior to January 28, 2021, you could be entitled to compensation. Our guide explains
What types of car finance are there?
As set out below, there are different types of finance to help you buy new or pre-owned cars. There is no best type of car finance, as the different loans available suit people in different situations.
These types of car finance include the below.
Personal contract purchase
For those who are unsure if they want to own their vehicle at the end of their financing period or upgrade to a new model, there’s the option of a Personal contract purchase (PCP).
As with hire purchase, you put down a deposit and then make monthly repayments. However, it won’t be based on the full value of your vehicle. Instead, it is worked out according to its projected resale value at the end of the term, based on a forecast of your annual mileage.
At the end of the loan term, you will be given the option to make what is known as a “balloon payment” to own the vehicle outright. This is a final payment based on what the dealer thinks the car is worth.
If you don’t want to pay this, and if you have stuck to the mileage allowance and kept the car in good condition, you can just return the car to the dealer once the hire term has elapsed and walk away. Otherwise you may be subject to a fee.
You may also have the option of getting some cash by trading the vehicle in for a new PCP deal.
Until and unless you make that payment, the finance company owns the car and you are the registered keeper.
Read more: Buying a car: The dangers of using PCP car finance
Compare PCP Car Finance Quotes
Easily compare PCP car finance quotes 24/7 from a large panel of lenders using the Magnitude online calculator. Simply create a quote, apply online and its expert team will handle the rest.
Why use Magnitude Finance?
- Competitive APR Rates from 8.9% Representative*
- Use a Trustpilot five Star rated team with expert knowledge.
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Magnitude’s award winning direct to consumer approach lets you take control of your car finance.
*8.9% APR Representative. Magnitude Finance is a Credit Broker, not a lender.
Personal loan
Just like using a personal loan for a home renovation or debt consolidation, you can take out a personal loan to buy a car.
We explain how loans work in more detail in our guide, and what options are available.
Personal loans offer predictability. You’ll be given a set repayment plan which you’ll need to adhere to and, if you don’t make your repayments on time, you risk damaging your credit score.
Unlike some of the other options mentioned below, with a personal loan you’ll own the vehicle outright from the date it’s purchased.
Hire purchase
With hire purchase finance, which you can usually get through the car dealer or an online broker, you generally put down a deposit, often 10% of the purchase price of a new or used car, and then repay the balance in monthly instalments at a fixed rate of interest.
You don’t own the car until you make the final payment.
Unlike using a personal loan, the lender has that security of ownership if the borrower can’t keep up the repayments. So a hire purchase can be an option for people with a low credit score.
At the end of an agreed period, you pay a transfer fee to have the car switched into your name. The level of the fee is set at the outset but depends on the lender.
Read more: ‘Can we still get a mortgage if my partner has bad credit?’
Compare car insurance with Quotezone
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*51% of consumers could save £504.25 on their car insurance. The saving was calculated by comparing the cheapest price found with the average of the next five cheapest prices quoted by insurers on Seopa Ltd’s insurance comparison website. This is based on representative cost savings from September 2023 data. The savings you could achieve are dependent on your individual circumstances.
Leasing (personal contract hire)
If you aren’t bothered about owning the car, you could consider leasing one.
Think of leasing a car like renting out a home, you’ll never own the vehicle and at the end of the agreement you can move on to a new agreement for a newer model.
The price you pay will depend on the make and model of the car you choose, as well as the number of miles you agree you will drive, and how long you will keep the car.
The leasing company budgets to sell the car on once you have finished with it, so after an initial deposit, the monthly payments you make will be set to cover the loss in value to the leasing company due to depreciation.
Service and maintenance are typically included in the price you are paying for the car, but you will have to stay within an agreed mileage per year or pay extra charges.
Read more: ‘Renting out my driveway earns me £200 a month’
What is the best way to finance a car?
There is no one best way to buy a car as your decision will depend on factors including the make and model you want, your finances and how many miles you are going to drive.
What is key is that you get affordable car finance that is right for you and gives you the flexibility you need. The best car loans are the ones that deliver on this.
The table below shows the typical characteristics of each type of finance.
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| Personal unsecured loan | Credit card | Secured car loan | Hire purchase | PCP | Leasing | |
| You need a deposit | No | No | Probably | Probably | Probably | Probably |
| You own the car straight away | Yes | Yes | Not if the car loan is secured on the car. | No | No | No |
| You own the car eventually | Yes | Yes | Yes | Yes | Only if you make a final balloon payment | No |
| You are charged if you go over a mileage limit | No | No | No | No | Yes | Yes |
| You can sell or change your car when you want | Yes | Yes | Not unless you have an unsecured ‘car loan’, which is really a personal loan. With a ‘logbook loan’, you cannot sell the car until the debt is paid. | No | No | No |
How easy is it to get car finance?
Getting car finance can be quick and easy, but you will have to pass a credit check and prove your identity. You may need a document such as a passport or driver’s licence, and in some cases you might be asked for proof of income.
Ensuring you have payslips, bank statements and documents proving your address history will help with the process.
Magnitude Finance, our preferred car finance specialists, say some applicants who apply online can get an answer instantly. To explore your options, visit its website for more information.
Can I get car finance with bad credit?
If your credit score is low, it might be hard to be accepted for car finance.
Checking your credit record using free services such as Credit Karma* will keep you updated on your score, and alert you to any possible problems that could derail your application.
Paying bills on time and being on the electoral roll can improve your chances, while missed payments on loans can have an adverse impact on your credit score, making borrowing more difficult in the future.
Read this article for more information on improving your credit score.
If you have a poor score, you could hold off the purchase and try to improve your credit rating. Alternatively you could look for lenders that will take you on anyway.
Is car finance worth it?
The cheapest way to buy a car is always to pay for it upfront. However, not everyone has the savings or credit facility to do this.
Because of this, car financing may be vital for many. What is important is that you look to find the best-value option for you and understand exactly what the terms of the deal are before you commit and drive that car off the forecourt.
Important information
Some of the products promoted are from our affiliate partners from whom we receive compensation. While we aim to feature some of the best products available, we cannot review every product on the market.
