By Joy Pearson

How does car finance work in the UK

How does car finance work in the UK
How does car finance work in the UK

20 April 2023
By Joy Pearson
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If you're looking to purchase a car in the UK, you may be considering car finance as a way to spread the cost over time. Car finance is an increasingly popular way for people in the UK to purchase a vehicle. In fact, according to recent reports by the Finance and Leasing Association, over 90% of new cars in the UK are brought on finance. But how does it actually work, and what are the different options available? 

Car finance is essentially a loan that you take out to pay for a car. The loan is usually secured against the car, which means that the car serves as collateral for the loan. This means that if you can't make the payments on the loan, the lender has the right to repossess the car to recover their losses. 

There are several different types of car finance options available in the UK, including Hire Purchase (HP), Personal Contract Purchase (PCP), and Personal Contract Hire (PCH). Each of these options has its own pros and cons, and it's important to understand them before making a decision. 

Hire Purchase (HP) is a straightforward form of car finance when you make monthly payments over a set period of time. At the end of the term, you own the car outright. HP is a popular option for those who want to own their car at the end of the finance term. 

Personal Contract Purchase (PCP) is another popular option, and it allows you to pay lower monthly payments. At the end of the term, you can choose to either pay a final "balloon" payment to own the car, hand the car back to the lender, or use the car as a part-exchange for a new PCP agreement. 

Personal Contract Hire (PCH) is a type of car leasing where you essentially rent the car for a set period of time. At the end of the term, you return the car to the lender. PCH can be a good option for those who don't want to own the car outright and prefer to have a new car every few years. 

When applying for car finance in the UK, you will usually be required to pass a credit check. This is to make sure that you are able to make the monthly payments and that you will not default on the loan. You will also need to provide proof of income, such as a payslip or bank statement. 

It's important to understand the terms and conditions of any car finance agreement before signing. You should read the fine print carefully, as there may be additional fees or charges that you are not aware of. You should also consider factors such as interest rates, deposit requirements, and the length of the finance term. Remember to shop around and compare different lenders to ensure you get the best deal possible. 

Remember that car finance is a significant financial commitment, so it's crucial to make sure that you can afford the repayments before you sign on the dotted line. If you're unsure about anything, don't hesitate to ask questions and seek advice from a financial expert. With careful planning and consideration, you can find the right finance option for suit your needs and budget, and drive away in the car of your dreams.