Car finance can help you get behind the wheel of a new or used car. But there are different options to choose from, each with pros and cons.

Here we’ll detail the main types of car finance. We’ll look at a quick car finance comparison so you can understand how each may fit your personal situation.

Types of Car Finance

The main different types of car finance are:

• Car loan: Borrow the money as a personal loan to buy the car outright and pay the loan off in monthly instalments.
• Hire Purchase (HP): Pay a deposit and monthly instalments to a finance company. Once you’ve made the final payment, the car is yours.
• Personal Contract Purchase (PCP): Pay a deposit and monthly instalments to a finance company. At the end of the contract, you need to make what’s called a balloon payment to own the car.
• Car Leasing: Lease a brand new car and make regular monthly payments. At the end of the contract, you return the car to the leasing company.

How does Car Finance work?

When you get a car on finance, it usually works like this:

• Find a car and car finance deal: You’ll choose a car and speak to the dealership about the potential finance deals on offer.
• Agree on a deal: You’ll decide on the type of car finance that suits your personal situation.
• Sign up for a contract length and conditions: Most car finance deals run between three and five years. Some contain certain conditions, like annual mileage with PCP.
• Borrow money: You’ll borrow from the lender to cover the cost of the car. This includes an initial deposit and regular monthly payments. With a car loan, you skip this step and buy the car outright when you borrow the money.
• Contract ends: When your car finance contract finishes, the next step depends on your original agreement and type of finance. With HP you’ll own the car outright once you’ve made your final payment. With PCP, you can pay a one-off balloon payment to own the car, hand it back to the dealership or use the equity to start a new PCP deal on a different car.

How much does Car Finance cost?

How much car finance costs depends on your chosen method of finance, the level of deposit you can put down and the interest rate on offer from the lender.

Our helpful helps you understand how all of these factors can impact the cost of your car finance.

What’s the cheapest way to finance a car?

Often, the cheapest and most simple way to buy a car is with cash. You’ll own the car outright, won’t pay interest and aren’t tied into an agreement.

Buying a car in full isn’t possible for many people. So, when it comes to car finance, you may consider a personal car loan. You can usually spread the cost of a loan from one to seven years and don’t necessarily need to put a deposit down.

With HP, your monthly payments will likely be higher than PCP, but you will own the car outright at the end of the contract. With PCP, your monthly payments will be lower, but you’ll need to factor the balloon payment in. On a PCP deal, the total amount of money you’ll pay back is likely to be higher than HP.

What’s the best car financing option?

It depends on your situation. There are advantages of disadvantages to each different car financing option.

Hire Purchase

Advantages:

• You own the car at the end of the contract
• Fixed monthly payments
• No excess mileage charges.

Disadvantages:

• You only own the car once you’ve made your final payment
• Monthly payments will likely be higher than PCP
• You can’t sell or modify the car until the end of the contract.

PCP

Advantages: 

• Lower monthly payments than other forms of car finance
• Flexibility to buy the car or hand it back at the end of the contract
• The option for a newer or higher model car.

Disadvantages:

• The car could be repossessed if you miss your payments
• Balloon payment at the end of the contract to own the car outright
• Excess mileage charges if you exceed your annual agreed amount.

Car loan

Advantages:

• You own the car outright from the start
• You can sell or modify your car without needing to get permission first
• The option to spread the payments out over a longer period of time to reduce your monthly payments.

Disadvantages:

• You may struggle for a loan if you have poor credit history
• It may take longer for the money to arrive than with car finance through the dealership
• Monthly payments can be more expensive – although this depends on the contract terms.

Can I repay my Car Finance early?

Yes, with car finance like HP and PCP, you can pay it off early. You can pay off your car finance at any point, but if you haven’t yet paid for 50% of the vehicle, you’ll need to pay the difference to the car finance company.

There may also be charges for early repayment. This is governed by the Consumer Credit Act, meaning that car finance companies can’t charge exorbitant fees. In line with the Act, the most you can be expected to pay is the outstanding capital on what you borrowed (but not the interest) alongside the lowest of the following:

• 1% of the amount repaid early
• 5% of the amount repaid early if there are less than 12 months left on the contract
• The remaining interest

But if your early repayment is for less than £8,000 you shouldn’t have to pay any extra charges.

What happens at the end of a car finance agreement?

One of the key differences between HP and PCP is what happens at the end of the agreement:

• HP: Once the final payment has been made you will own the car outright.
• PCP: At the end of the agreement you can pay a balloon payment to own the car, hand it back and walk away from the deal, or use the equity in the car to sign up for a new PCP deal on a different car.

How Asda Can Help

At Asda Money, we can help you find the right car loan from our panel of trusted UK lenders. You can check your eligibility without it affecting your credit score. Our wide panel of UK lenders provide offers based on your personal credit situation and are tailored to your specific borrowing needs.

If no offers are available, our free and impartial Financial Support service can help you understand what options are available to you.

Compare car finance options using a trusted panel of lenders today!

Car Finance FAQs

What is the 1/3 rule for car finance?

The 1/3 rule for car finance means that if you’ve paid more than a third of the total value of the car, the car finance company can’t repossess it without taking legal action.

What is car refinancing?

Car refinancing is where you take out new finance to pay off your existing car finance deal, usually through a personal loan.

Is it hard to get accepted for car finance?

You may find it difficult to get accepted for car finance if you have a poor credit history. Car finance companies will review your personal circumstances, credit history and income when you make the application.

What is the maximum age for car finance?

It depends on the provider and some may consider any age above 18 dependant on circumstance, but in most cases, the maximum age for car finance is 75.

What can stop you getting car finance?

A poor credit history may stop you from getting car finance as lenders will look at your credit score when deciding on your application.

Do car finance companies check income?

Car finance companies will look at a range of personal details when deciding on your application. Income is one factor that they’ll use to decide whether you can afford the monthly payments.