What is car finance and how does it work?

Buying your next car with finance is a great way to get into the driving seat by using your monthly budget instead of a lump sum of cash.

There’s a couple of different ways to finance your car but, generally, they all involve making an agreement with a lender (usually a bank) to pay for the total cost of the car on your behalf. You’ll agree to pay the money back to the lender over an agreed period of time (the “term” of the agreement) with a little extra cash on top (also called “interest”)

Whilst you’re paying the lender back, you won’t legally own the car. When you become the legal owner of the car depends on the type of finance you take out – and only once you've made all of your monthly payments.

The different types of car finance

Choosing the type of car finance you’d like to use shouldn't be too tough. It all boils down to:

  • Whether or not you’d like to be the owner of the car at the end of the agreement
  • How much you want to pay each month
  • Whether or not you’re happy to limit your annual mileage

In the table below, we've covered the benefits of the two types of car finance available at Car Store – PCP (Personal Contract Purchase) and HP (Hire Purchase).

Personal Contract Purchase (PCP)

Hire Purchase (HP)

Flexibility at the end of your agreement

The car is yours to keep once you’ve paid all the monthly payments and the option to purchase fee

Monthly payments are usually lower because part of the car’s cost is deferred until the end of the agreement

No annual mileage caps

You can choose to pay a lump sum to own the car outright at the end of the deal

️No penalties for damage or excessive wear and tear

Our car finance chooser can also help you decide which type of finance is the right one for you.

Credit checks

Before lending you the money to pay for your car, car finance lenders will run a “credit check” to see how likely you are to pay your monthly repayments on time and in full. To do this, they’ll check your credit report with a credit reference agency. This report covers things like your total current debt, your income and whether you’ve paid your bills on time in the past. It’s usually a good idea to check your credit report before applying for any form of finance so that you can see what lenders will see – and correct any mistakes that might be present on your report. Check out moneysavingexpert.com’s brilliant guide on checking your credit report for free.

Though credit checks are necessary, don’t let them worry you. Even if you've had a hard time getting credit in the past or have a poor credit score – our finance gurus will be able to help. Chat to them online here.

Ready to find yours?