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Car Finance Explained

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  • Hire purchase?
  • Personal contract purchase?
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The various types of vehicle financing

What's the difference between hire purchase (HP) personal contract purchase (PCP), personal loans, and guarantor loans? Don't worry if you can't differentiate between all these financial jargon. We've got your back. It's our job to explain these financial products in a way that's easy to understand, so that you can pick the type of loan that's best for your situation.

Read on below to learn about the different types of car loans.

Hire Purchase (HP)

In a HP, part of the monthly installments is used to reduce the loan's principal balance until it is eventually extinguished at the end of the term. You have the choice of putting down a deposit which will go towards reducing the loan's principal balance.

Pros:

  • The potential to enjoy lower interest rates relative to other types of auto loans
  • Fixed monthly payments
  • The ownership of the car passes to you at the end of the agreement
  • Don't have to worry about mileage restrictions
  • Option for early settlement

Cons:

  • Higher monthly installments for shorter agreements
  • The auto finance company has the right to repossess the car if you default on the loan
Personal Contract Purchase (PCP)

In a PCP, you put down a deposit and make monthly payments for the term of the agreement. Ownership of the car does not automatically transfer to you at the end of the term. So, you have to return the car unless you choose to pay a specific final sum of money to the auto finance company A.K.A. a ballon payment. The size of the ballon payment is usually close to the value of the car (estimated by the auto finance company) at the end of the term.

Pros:

  • Lower monthly payments as a portion of the loan's principal is not amortized over the term of the loan.
  • You have the option of either keeping the car or returning it to the auto finance company at the end of the term.
  • Fixed monthly payments

Cons:

  • You may incur additional expenses for damage or excess mileage if you choose to return the car at the end of the term.
  • You'll have to prepare money for the balloon payment if you want to keep the car.
  • Interest is charged on both the amortizing principal balance and the portion of the loan's principal that doesn't amortize over the term of the agreement.
  • Your deposit is not applied towards reducing the principal balance
Personal loan

In a personal loan, you receive the loan proceeds from the finance company. You can then use the money to purchase a car.

Pros:

  • You may be able to negotiate better terms with the car dealer as they know that you definitely have the money to follow-through with your purchase.
  • Fixed monthly payments (usually).
  • Fixed monthly payments (usually).

Cons:

  • Your application for a personal loan may get rejected if you don't have a good credit record
  • The amount of money you can borrow may be less than other types of financing (usually not more than £25,000).
Guarantor loan

In a guarantor loan, you need a guarantor to co-sign the loan agreement. If you default on the loan, the guarantor will be obligated to repay the loan.

Pros:

  • Someone without a good credit rating may have a higher chance of approval if he/she has a guarantor.
  • Fixed monthly payments.
  • Guarantor loans are usually not secured against the car, so you have the option of selling the car anytime.

Cons:

  • It may not be so easy to find someone that's willing to be a guarantor for the loan. The finance company usually only allows someone to be a guarantor if he/she is a homeowner.

Here a few things to keep in mind regardless of the type of loan you may want to use:

  • Failure to make your loan payments can negatively impact your credit record
  • Before agreeing to take the loan, it's important to be sure that you can afford the loan payments, and that the loan payments won't become a financial burden to you.
  • You can usually trade-in your vehicle. The car dealer will pay off the balance of the loan. Any positive equity will be applied towards reducing the deposit for the new car.
Want a car loan or have some concerns?

We hope that you will contact us Today for a free, non-obligatory quote. Our friendly, knowledgeable advisers are ready to guide you towards selecting a loan product that's able to meet your needs. We will then try to source the lowest possible interest rate for you if you decide to proceed with using our services. We're eager to serve you regardless of your credit record.

Apply now for a decision today