How does car finance work?

Finance is a way for you to buy a car without needing to pay the whole amount upfront. There are two main car finance options available:

  • Hire Purchase (HP)
  • Personal Contract Plan (PCP)

We’re going to explain what each of these finance options means, the benefits and the potential drawbacks here.

Hire Purchase (HP)

Hire Purchase is where you ‘hire’ the vehicle from the finance company, making regular monthly payments. You have the option of paying a deposit and then borrow the remaining balance for the car over a set period. You’ll also pay interest on the balance.

The repayments will usually last 12, 24, 36, 48 or 60 months and at the end of the agreement, you will have paid for the whole cost of the vehicle – including any interest and any fees which were agreed. You will then own the vehicle at the end – this is the biggest difference between the two finance options.

Benefits of Hire Purchase:

  • Fixed monthly repayments over an agreed period.
  • You own the vehicle at the end of the agreement.

HP is good if:

  • You want fixed monthly repayments.
  • You want to own the vehicle once all repayments have been made.

Personal Contract Plan (PCP)

If you choose to finance a car using a Personal Contract Plan, (PCP), you’re only paying for part of the total amount due.

You may need to provide a deposit (usually10% of the vehicle’s value). You’ll then borrow a lot less than you would using Hire Purchase. This is because you only pay the amount the finance company predicts the car will lose over the term (the depreciation). You then have the choice to return the vehicle at the end of the agreement, or you can pay a lump sum (known as a balloon payment) to buy the vehicle. You may be able trade the car in for a different model at the end of the term.

Benefits of PCP:

No need to worry about depreciation.

Lower monthly instalments for a better car.

PCP is good if:

You like to change your car frequently.

Are not bothered about owning a car outright.

Car finance options explained

Car finance as a concept is simple. You pay regular monthly payments instead of buying a car outright, spreading the cost over an agreed term, including interest. There are some essential details regarding car finance you should consider before applying.

You don’t own the car

You don’t own the vehicle until either the final payment – or a balloon payment – has been made. This is one of the reasons why you won’t be able to sell a vehicle on finance.

The car is owned by the finance company throughout the term, and you cover the total cost with monthly repayments.

You can buy the car outright

At the end of an agreement, you’ll be able to buy your car outright from the lender (PCP), or if it’s on HP, you’ll own it as soon as the last payment is made.

With PCP, you have the option of handing the car back and starting all over again with another agreement. Alternatively, once your HP finance agreement is finished, you could sell that vehicle and use the money as a deposit for your next car.

You can get car finance with bad credit

Zuto and its panel of lenders are here to help people with bad credit car finance. Before you apply for any finance you should check your credit score to see how you could boost it. You can then apply for car finance and Zuto will do a soft credit check.

This doesn’t affect your credit score but can give you an idea about the options available to you. If you get accepted, a hard credit score will then be done. A hard credit check will show on your credit report for six years. All car finance companies will perform a hard credit check before making a decision.


Why do people choose car finance

There are many reasons why people choose to use finance for their vehicle. Some of the biggest draws to using finance include:

  • Flexible payments. You can control how long your term agreement is and how much you’re paying each month.
  • Having different car finance options available can make getting the latest car without needing to pay the whole cost up front.
  • Get a model upgrade. With certain finance options, such as PCP, you can hand back the vehicle at the end of the agreement and start the journey all over again with a newer model.
  • Boosting your credit score. Having finance where payments are regularly made and never missed can help boost your credit score.

Other payment options

If you’re wanting to upgrade your car, but you’re unsure about whether HP or PCP finance is right for you, there are some other options available.

Personal loan

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Personal loans are where you borrow a lump sum of money from a finance provider to cover the whole cost of your vehicle.

You will then make regular loan repayments to the finance company over an agreed term. Bear in mind that even if you sell the vehicle, you will still be responsible for making the loan repayments.

You will typically need a good credit score to be approved for a personal loan and you don't get the same level of protection as you do with other car finance plans with the loan not secured against the vehicle. Read more on your consumer protection here.

Benefits of a personal loan

  • Own your new car from the start.
  • No restrictions on your car from the lender.

A personal loan is good if:

  • You have good credit.
  • You wish to sell on/make modifications to your car.
  • You want to buy an older or high-mileage vehicle.

Fixed-sum loan

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A fixed-sum loan provides you with a fixed repayment plan and a fixed rate of interest and the car belongs to you from the start of the loan. However, unlike a personal loan, you cannot sell or part with the vehicle until the finance is settled.

Unlike a traditional personal loan, you have lender support should things go wrong with the vehicle within the first six months after purchase, because the car is written into the finance agreement as an asset.

Benefits of fixed sum loans:

  • Different from a personal loan.
  • Your car is named as an asset in finance plan.

A fixed sum loan is good if:

  • You want a fixed repayment plan.
  • You want your car protected as a named asset.

Conditional sale

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With a conditional sale arrangement, you commit to buying the car from the start. This means the vehicle is automatically yours once you’ve paid the final instalment of the finance plan.

Simply choose the car and Zuto will arrange for the payment of the vehicle. You’ll then hire the car from the finance company, taking responsibility for it and making monthly payments until you have paid the total amount owed.

Benefits of a conditional sale

  • 12- to 60-month finance plans available
  • Optional deposit to reduce monthly repayments

Conditional Sale is good if:

  • You want fixed monthly repayments
  • You wish to own the car in the long term.

Contact Zuto today for guidance on finding the best car finance options for you.

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