Vehicle finance gives you a way to buy a car when you don't have the cash to pay upfront. It may seem daunting but the reality is nearly 8 out of 10 cars are bought using vehicle finance in the UK. *

Vehicle finance can also be used to purchase motorbikes, vans, caravans and more. Zuto can help you find the right finance deal and lender for your individual circumstances but if you want to know more about the various vehicle finance products available, we've put together this simple guide to help.

Vehicle Finance Basics

Understanding the Numbers

  • The total amount you pay back includes the cost of interest and any fees as well as the cost of the vehicle. The cost of interest and fees is given in what's called the APR (Annual Percentage Rate).
  • As the APR is the only figure that includes all the costs involved, it's the number you need to look at when comparing deals. The lower the APR, the better.
  • The longer the repayment period, the more you pay in total but the less you pay each month.
  • The shorter the repayment period, the less you pay in total but the more you pay each month.
  • You can cut both monthly repayment amounts and the total cost of interest by paying a bigger deposit.
  • The better your credit rating, the lower the interest rates you’ll be offered.

Affording the payments

  • When you buy a car on finance, you commit to making regular monthly repayments. This means it’s important to work out what you can afford before you go ahead. People sometimes think you can just hand the car back if you can’t afford it. It’s not that simple.
  • If you miss payments, you’ll hurt your credit score. This can make it harder for you to get finance of any sort in future. It’s down to you to insure and maintain the car. Make sure you allow for these costs, too.
  • If you’re concerned about affordability, it’s a good idea to take independent financial advice. There’s also a useful article on understanding car affordability in our Car Buying Guide.

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Types of Car Finance

Hire Purchase (HP)

This is a very straightforward form of car finance. You choose the car; the finance company pays the dealer. You then hire the car from the finance company, taking responsibility for it and making monthly payments until you have paid the total amount owed. At the end of the repayment period, you have the option to take ownership of the car.

Fixed Monthly Repayments?

Yes

Repayment periods available

Usually 12–60 months

Deposit

Recommended deposit is usually 10%

Best for?

People who want to own their own car in the long term and can’t get or don’t want a personal loan.

Who owns the car?

The finance company owns the car during the repayment period. If at the end of the term you take up the option to purchase, the car becomes legally yours. As you’ve paid off the cost of the car by this point, all you pay is a small admin fee. This is typically between £100 and £200.

Flexibility to sell/pay off early

You can end the agreement early by paying the total due. The car is then yours to sell. There may be a charge for early repayment, but you will save on interest.

Getting behind with payments

Fall behind with payments, and the finance company can take the car back. They will sell it and use the money to repay your debt. If they don’t get enough, you will have to pay the difference plus any court costs.

If you have paid (or can pay) 50% of the total owed, you can choose to give the car back. You will have to pay for any missed instalments due up to the time you end the agreement. You may also find it harder to get credit after.

What’s most important is to plan what you can afford before deciding what to borrow. Set the repayments at a level you’re comfortable with, and HP should be simple and trouble-free.

Conditional Sale

A conditional sale arrangement is like hire purchase except you commit to buying the car from the start. This makes it automatically yours once you’ve paid the final instalment.

You choose the car; the finance company pays the dealer. You then hire the car from the finance company, taking responsibility for it and making monthly payments until you have paid the total amount owed. At the end of the repayment period, you have the option to take ownership of the car.

Fixed monthly repayments?

Yes

Repayment periods available

Usually 12–60 months

Deposit

Recommended deposit is usually 10%

Best for?

People who want to own their car in the long term.

Who owns the car?

The finance company owns the car during the repayment period. Once you've made the final payment, it's yours.

Flexibility to sell/pay off early

You can end the agreement early by paying the total due. The car is then yours to sell. There may be a charge for early repayment, but you will save on interest.

Getting behind with payments

Fall behind with payments, and the finance company can take the car back. They will sell it and use the money to repay your debt. If they don’t get enough, you will have to pay the difference plus any court costs.

If you have paid (or can pay) 50% of the total owed, you can choose to give the car back. You will have to pay for any missed instalments due up to the time you end the agreement. You may also find it harder to get credit after.

What’s most important is to plan what you can afford before deciding what to borrow. Set the repayments at a level you’re comfortable with, and HP should be simple and trouble-free.

Personal Contract Purchase (PCP)

With PCP, as with HP, you choose the car and the finance company pays the dealer. You still pay monthly instalments to the finance company as with other forms of credit, but you are only paying for part of the total amount due. The rest is due as a lump sum (balloon payment) at the end of the repayment period. This means you pay less each month for a car of the same value than you would with a traditional HP plan. At the end of the repayment period you can simply give the car back and start again with a newer vehicle. Alternatively, you can pay the pre-agreed balloon payment and buy the car.

There are a couple of possible complications around returning the car. First, it has to be in good condition—you’ll be charged for the costs of any damage. Second, you have to estimate your mileage at the start. If you go over, you'll be charged (say 10p a mile) for every mile above the estimate, unless you renegotiate beforehand.

Fixed monthly repayments?

Yes

Repayment periods available

Typically 12–36 months, but can be longer

Deposit

Recommended deposit is usually 10%

Best for?

People with a reasonable credit score who like to update their car every few years and are happy not to be car owners. If you want to buy a car outright, other finance options will probably work out cheaper overall.

Who owns the car?

The finance company own the car during the repayment period. If you choose to buy the car at the end of the period rather than giving it back, it becomes yours once you’ve made the final balloon payment.

Flexibility to sell/pay off early

If you want to sell the car before the end of the term, you’ll have to pay the agreement off early. This will almost certainly cost you a lot more than if you waited until the end, because of the way de- preciation is worked out.

Getting behind with payments

Fall behind with payments, and the finance company can take the car back. They will sell it and use the money to repay your debt. If they don’t get enough, you’ll have to pay the difference plus any court costs. If you have paid (or can pay) 50% of the total owed, you can choose to give the car back. You will have to pay for any missed instalments due up to the time you end the agreement. You may also find it harder to get credit after.

PCP can be a great way to get to drive a car you couldn’t otherwise afford—but it’s essential to do your sums beforehand so you can be confident you won’t run into difficulties.

Personal Loan

Personal loans are often referred to as car loans and are not secured to the vehicle you buy. We’ve set up a special page to explain how these differ from PCP, HP and Conditional Sales.

See car loans

Why come to Zuto for Vehicle Finance?

The traditional way of arranging car finance is to take out a finance plan from the dealer when you buy the car. But if you sort things out with Zuto before you get that far, you give yourself three big advantages:

With Zuto:

  • You know exactly what you can afford before you get to the dealer - you’re negotiating from a position of strength
  • You’ve had the chance to make sure you’ve got a deal that’s right for you. Dealers usually offer only one finance provider and a very limited choice of deals
  • You save time—we’ll deliver a lending decision within seconds and help you with all the admin, paperwork and negotiations with the dealer. That way, you can drive straight off in your new car rather than spending hours in the dealer’s office

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Vehicle finance words and phrases

Knowledge is power. We’ve put together simple definitions for the finance terms and jargon you’ll find in contracts and around the web.

See Finance Terms and Jargon