If you are shopping around for a car, you may be considering used car finance to fund your purchase. Car finance agreements offer great flexibility in terms of spreading payments and there are many options to choose from depending on your needs.

Each type of car finance comes with its own advantages and disadvantages; understanding these are crucial in making sure you choose the right option. This guide will give you an overview of the car finance options available and highlight the things you should consider before making a decision.

Used car finance explained

Used car finance is an umbrella term used to describe a variety of options to borrow money to fund the purchase of a used car. The most common forms of car finance are personal contract purchase (PCP), hire purchase (HP), conditional sales (CS) and leasing.

How does used car finance work?

Most car finance agreements will begin by paying a deposit. However, some deals such as PCP don’t always require you to. You’ll then pay fixed monthly payments over a term agreed with the lender.

When you come to the end of an agreement, you will be given a few options depending on the type of car finance you choose. With some, you own the car from the beginning of the agreement and with others, you will own the car at the end of the term after making an additional payment or small fee.

There are also options that simply allow you to return the car or trade it in for a new one. We’ll explore the different types of car finance options below.

Car finance options

Personal contract purchase

With PCP finance, you’ll be expected to pay a deposit followed by fixed monthly payments. During these payments, the car belongs to the finance company and at the end of the agreement, you will have the option to either make a balloon payment to keep the car, exchange the car or return the car. PCP car finance agreements are a great option if you intend to change cars regularly.

Pros of PCP car finance:

Can get accepted with low credit scores
Options to change your car more frequently
Protected against depreciation of the vehicle

Cons of PCP car finance:

Additional charges for damages and mileage
Ending the contract early can be costly
The final balloon payment can be high

Hire purchase

HP car finance is very similar to PCP finance, however, you will not be expected to make a balloon payment at the end of the term if you wish to keep the car. Instead, you will have to pay a small ‘option to purchase’ fee.

Pros of HP car finance:

Flexible payment periods with fixed monthly payments
No mileage restrictions or balloon payments
Can be used on both new and used vehicles

Cons of HP car finance:

Monthly instalments are typically higher than PCP finance
Poor credit scores can result in higher interest
Failure to keep up with monthly payments can result in repossession

Conditional sale

CS car finance is very similar to HP finance agreements. However, unlike HP finance you will become the legal owner of the vehicle at the start of the agreement and you will not have to pay any additional fees to own it.

Pros of CS car finance:

Flexible payment periods with fixed monthly payments
The vehicle is legally yours after the final payment
Can be used on both new and used vehicles

Cons of CS car finance:

Monthly instalments are typically higher than PCP finance
Won't be able to sell or modify the vehicle until the agreement is paid off in full
Failure to keep up with monthly payments can result in repossession

Leasing

Much like HP, PCP and CS, leasing involves paying an initial deposit followed by fixed monthly payments. However, the biggest difference is that you will not own the car at the end and you won’t have the option to purchase it. This form of car finance can be particularly useful if you have no intention of owning the car once the finance agreement ends.

Can you lease a used car?

Yes, it is possible to take out a leasing agreement on a used car. However, it is much rarer than HP, PCP or even CS car finance, and only a minority of dealers will provide this method of financing.

Pros of leasing:

Monthly payments can be cheaper
Some maintenance costs will be covered under the manufacturer's warranty
Options to change your car more frequently

Cons of leasing:

Additional charges for damages and mileage
Not usually available on used cars
You will not own the car

What checks are done for car finance?

If you choose to take out car finance, the lender will perform checks to assess your eligibility for finance before you are accepted.

Credit check

Initially, the finance company will carry out a soft credit check to get a general overview of your credit history to assess your eligibility. Soft credit checks do not have an effect on your credit score. Once you have your initial agreement and if you decide to proceed, a hard credit check will be carried out. Unlike a soft credit check, this type of credit check looks at your full credit history and can damage your credit score if you carry out too many in a short space of time.

Proof of identity

The lender will also require proof of identity, usually in the form of a driver’s licence or passport. This is so you can prove who you are and to ensure you are not committing an act of fraud.

Proof of address

You will usually be required to provide a minimum of three years of address history. This can be done by providing copies of your utility bills.

Income and employment history

In order to assess your capability to pay back the car finance, lenders will want to see proof of your income. If you are self-employed you might need to provide additional information to the lender.

Driver’s licence

Many lenders will require you to provide a valid driver’s license to prove your legal status to drive. Without this, you may have your application rejected.

How long does car finance approval take?

On average it will take between 1-2 days for car finance to be approved, however, some lenders can give you a response sooner. The length of time will usually depend on what checks are involved.

At Motor’s we’ve partnered with CarMoney to find you the most suitable car finance option for you. For a quick estimate for HP car finance, use our finance calculator.

How to get the best used car finance deal

Whilst many terms of the car finance agreement are fixed such as interest rates and APR, there are some things you can do in order to lower your monthly repayments and get the best car finance deal.

Consider the deposit amount and length of the term

Comparing different term lengths and deposit amounts can have an effect on the monthly payments and how much you will pay overall. If you are able to, putting down a larger deposit can reduce your monthly payments.

Whilst opting for a longer term can reduce your monthly payments, you might end up paying more in interest overall. Therefore a shorter term could be the better option.

Improve your credit score

Your credit score will dictate the terms of your agreement and the interest rates you are offered. If your credit score is low or you haven’t yet built a credit rating, lenders will consider you more of a risk. Because of this, your finance options might be more limited and you can expect to pay more in interest. Improving your credit score before you apply for a car finance agreement will increase your chances of getting a better deal.

Be aware of the extras and fees

With some agreements, you will be charged a fee if you break the terms of your agreement. For example, if you exceed your mileage allowance or damage the vehicle beyond what is considered fair wear and tear. It is always a good idea to consider whether you could afford these if you were required to pay them.

Compare multiple deals

There are lots of deals out there and shopping around for car finance agreements is a great way to ensure you are getting the best deal. Whilst there isn’t a limit to how many soft checks you can have, we would not advise carrying out multiple hard credit checks. This can damage your credit score and in turn, make you ineligible for the best deals. Most car finance calculators are speculative so will only conduct soft searches initially.

Alternative ways to finance a used car

Using a credit card to buy a car

Purchasing a used car on a credit card can not only give you flexibility in terms of payment, but it will also provide you will additional protection under Section 75 of the Consumer Credit Act. That being said, some used car dealers might charge a card handle fee which can be as high as 3% and some might not accept them at all.

Pros of buying a car using a credit card :

Protected under the Consumer Credit Act 1974
Some credit cards offer rewards
Some offer 0% interest

Cons of buying a car using a credit card :

Some dealers will not accept credit cards
Additional charges for using a credit card
Might not qualify for a high credit limit or a 0% card.

Personal Loan

A personal loan, also known as a bank loan, is another popular way to finance a car. Much like other forms of car finance, personal loans will be repaid on a monthly schedule set up with the bank. The terms of a personal loan will be dependent on your credit score and how much you are intending to borrow.

Pros of buying a car using a personal loans:

Can be a simple way to finance a car
Interest rates can be fixed
You own the car so have the option to sell it at any time

Cons of buying a car using a personal loans:

Monthly payments can be higher
You might end up borrowing more than you planned
Poor credit scores likely won’t qualify

Frequently Asked Questions

Can I sell a car on finance?

You will not be able to sell a car on finance until the finance amount has been settled. If you wish to end your car finance agreement early, you will need to speak to the lender to arrange a settlement figure. This figure will state the amount you owe and it should be provided to you within 12 days of the request.

If you have used a personal loan or paid with a credit card, you will be able to sell the vehicle, however, the debt will still need to be paid off.

Will I get car finance with a poor credit score?

Whilst it is possible to get approved for car finance with a low credit score, you should expect to pay higher interest rates. Choosing to pay a larger deposit or borrowing a smaller amount can increase your chances of securing a car finance agreement with lower interest rates.

How many months is best to finance a car?

Typically car finance agreements can last anywhere from 3-4 years but some finance companies can offer longer terms. Whilst a longer term will reduce your monthly repayment amount, you will end up paying more in interest rates overall as you’ll be paying it off for longer.

Is it good to pay car finance early?

Paying off a car finance agreement early can help save you money with regard to the interest you owe. For example, if your vehicle is in negative equity you might want to consider paying it off early.

If you wish to pay off your car finance deal early, it is always best to contact the lender to discuss this as you might be required to pay additional fees.

What is APR on car finance?

APR stands for Annual Percentage Rate and is expressed as a percentage. It refers to the cost of borrowing over a year which includes standard fees and interest.

How are interest rate rises impacting car finance?

Interest rates are determined by a number of factors and they fluctuate depending on circumstances in the market. As interest rates increase, this will also increase the interest rate for car finance.

Month to month, the interest rate increases will translate to small increases in monthly repayments. However, over the longer term, these small increments will begin to add up and comparing car finance rates from last year to this year you will see a visible difference.

Most car finance agreements in the UK have fixed interest rates, so if you already have a car finance agreement or have recently signed a new agreement, the rate will be fixed for the remainder of the term.

What is GAP insurance?

GAP stands for Guaranteed Asset Protection. GAP insurance covers the difference between the amount you paid or owe for your vehicle compared to the amount your insurance company would pay you if your vehicle was stolen or written off. Cars depreciate in value over time and your insurer will only pay out what it is worth at the time of an accident or theft. However, if you have GAP insurance, this would help to cover the difference.

Lastest Finance Guides

What is PCP Car Finance?

If you’re looking to purchase a used car, you might be considering a Personal Contract Purchase finance agreement as a method of payment. Personal contract purchase, also kno...

Read more

What is Hire Purchase Finance?

Hire Purchase (HP) agreements are a popular car finance option for anyone looking to buy a used car. Whilst HP agreements are a relatively simple way to finance your next used car,...

Read more

What is a Conditional Sale Agreement?

If you are looking to finance a used car, you may have encountered different types of financing options including conditional sale agreements. This can often throw up more question...

Read more
Steve Edwards
A certified car nerd who has been creating car content since 2015, Steve is much happier talking about used cars under £15,000 than the latest hypercar. He’s been advising friends and family on their next used car purchase for as long as he can remember – handy experience for his current role in charge of content at MOTORS. As a father of two young kids who covers a lot of miles, he tends to value safety, practicality and comfort above all else, so he has a soft spot for massive SUVs and premium estate cars.
Article published August 22nd, 2023