Car financing — spreading the cost of a car across monthly payments — is how most UK buyers get behind the wheel today. But the type of finance you choose shapes what you pay each month and whether you'll own the car. You can match the right car financing option from the 4 main types: HP, PCP, personal loans, and leasing
Car finance lets you spread the cost of a vehicle over an agreed period of time through fixed monthly payments, rather than buying it outright with cash. Most new cars sold in the UK are bought this way, it's the standard route, and options exist for budgets and credit profiles.
The 4 main types you'll find in the UK market are Hire Purchase (HP), Personal Contract Purchase (PCP), Personal Contract Hire (PCH), and personal loans. Each works differently: some lead to ownership, some don't; some keep payments low, others reduce the total you pay overall. Knowing how each one works before you sign a finance agreement is the difference between a deal that fits your life and one that doesn't.
These estimates are subject to credit checks and may change when you apply for finance. this is for example purposes only
Maximum borrowable amount
Rates from 9.9% APR: the exact rate you will be offered will be based on your circumstances, subject to status. Representative Hire purchase (HP) example: borrowing £7,000 over 5 years with a representative APR of 21.9%, the annual interest rate of 21.9% (Fixed) and a deposit of £0, the amount payable would be £185.33 per month, with a total cost of credit of £4,119.81 and a total amount payable of £11,119.81. We look to find the best rate from our panel of lenders and will offer you the best deal that you're eligible for. We receive a fixed fee commission per finance agreement, or we receive a commission based on a percentage of the total amount of finance taken. This will not affect the interest rate offered or the total amount repayable. Our service is free.
The UK's main car finance options are Hire Purchase (HP), Personal Contract Purchase (PCP), Personal Contract Hire (PCH, also called car leasing), and personal loans. Each works differently: from how much you pay each month to whether you own the car at the end.
A hire purchase agreement spreads the full cost of a car across fixed monthly payments, with ownership transferring to you once the final payment is made. You put down a deposit — typically 10–20% of the car's price, then fixed instalments covering the remaining balance plus interest over 12 to 60 months. A nominal transfer fee (usually £100–£500) with the last payment makes the car yours outright.
HP monthly payments are higher than PCP or leasing because you're repaying the car's full value. But there are no mileage limits, no balloon payment, and no condition penalties at the end.
Worked example: a £20,000 car with a £3,000 deposit over 48 months at 6% APR works out to roughly £370/month.
Personal Contract Purchase keeps monthly payments lower by deferring a large chunk of the car's value to the end as a balloon payment — the Guaranteed Future Value (GFV). Your monthly payments cover only the car's expected depreciation, plus interest on the full amount including the GFV.
At the end, you have three options: pay the GFV to own the car, return it and walk away, or trade it in and roll any equity into a new deal. Mileage limits apply, exceeding them triggers excess charges.
Worked example: a £24,000 car with a £3,000 deposit over 36 months produces roughly £290/month, with a £13,500 balloon due at the end.
Good text overall — one flag: at typical current PCP rates (representative APR is usually quoted around 9–11% per FCA rules), £290/month for that example implies a lower APR (roughly 6%), which is achievable on manufacturer-subsidised deals but optimistic for a standard lender quote. Worth treating it as illustrative rather than a guaranteed rate.
Personal Contract Purchase keeps monthly payments lower by deferring a large chunk of the car's value to the end as a balloon payment — the Guaranteed Minimum Future Value (GMFV/GFV). Your monthly payments cover only the car's expected depreciation, plus interest on the full amount financed, including the GFV.
At the end, you have three options: pay the GFV to own the car, return it and walk away, or trade it in and roll any equity into a new deal. Mileage limits apply (typically 8,000–12,000 miles/year); exceeding them triggers excess charges, usually 3p–30p per mile.
Worked example: a £24,000 car with a £3,000 deposit over 36 months produces roughly £290/month (implying an APR around 6%), with a £13,500 balloon due at the end. At a more typical current representative rate (9–10% APR), expect payments closer to £330–350/month for the same numbers.
A few refinements based on current lease terms: road tax being bundled in is universal, but breakdown cover varies by provider (often included, sometimes an optional extra) — worth confirming per quote. Also, one correction on VAT: personal (consumer) PCH quotes are usually already VAT-inclusive; the "add 20%" caveat applies mainly to Business Contract Hire (BCH) quotes, which are shown excluding VAT.
Personal Contract Hire (PCH) is a long-term rental: you pay an initial rental — often 3–9 months upfront — then fixed payments for 2–5 years, and return the car at the end. You never own it, and there's no option to buy.
Most PCH agreements include road tax as standard; breakdown cover is commonly included too, but check your specific quote. Annual mileage limits typically run from 5,000 to 30,000 miles; excess mileage (usually 5p–15p per mile) and fair-wear-and-tear damage charges apply at handback. Many lessees upgrade to a new car every 2–3 years.
Personal leases are quoted VAT-inclusive — if you're comparing against a business lease (BCH) quote, that's usually shown excluding VAT, since businesses can typically reclaim 50–100% of it.
One nuance to flag: the "lower rates for £15,000+" point is close but slightly off — most UK lenders offer their cheapest rates on loans between roughly £7,500 and £15,000, not just above £15,000. Below about £5,000, rates step up noticeably because smaller loans cost lenders more per pound to administer.
A personal loan lets you borrow a fixed sum from a bank or lender to buy the car outright, making you the owner from day one with no finance tied to the vehicle. Monthly repayments are fixed, and the loan is unsecured — the lender has no claim on the car if you miss payments. Loans between roughly £7,500–£15,000 typically get the lowest advertised rates; smaller amounts often attract higher APRs.
Because it's unsecured, approval depends more heavily on your credit profile and income than with HP or PCP — lenders take on more risk without the car as security, so strong credit is usually needed to access the best rates.
When you compare car finance, four types sit side by side — HP, PCP, PCH leasing, and personal loans — each scoring differently on the dimensions that matter most to budget-conscious buyers: payment size, total cost, ownership, and credit requirements. A lower monthly payment does not always mean a cheaper deal overall.
| HP | PCP | PCH (leasing) | Personal loan | |
|---|---|---|---|---|
| Payment | Higher | Lower | Lowest | Varies by loan size |
| Own the car at end? | Yes — after final payment | Optional, pay the balloon | No | Yes, from day one |
| End-of-term flexibility | Low | High (3 options) | Low (return only) | High (you own it) |
| Mileage limits | None | Yes | Yes | None |
| Deposit required | Yes (10–20%) | Yes (10–20%) | Yes (3–6 months upfront) | No |
| Credit score needed | Fair to good | Good | Good | Fair to good |
| Typical term (months) | 12–60 | 24–48 | 24–60 | 12–84 |
PCH (leasing) typically delivers the lowest monthly payment because you build no equity — you pay purely for use of the car. PCP comes next: monthly payments cover only the car's depreciation, not its full value. HP and personal loans cost more per month because you're working toward ownership.
On a £20,000 car with a £2,000 deposit (10%), typical monthly figures run roughly: PCH around £280, PCP around £290, a personal loan around £304, and HP around £370. A larger deposit cuts all of these. Every extra pound upfront reduces both the monthly payment and the total interest you pay.
HP gives you ownership once the final payment clears. A personal loan hands you ownership from day one, since you buy the car outright with borrowed money.
Personal Contract Purchase gives you 3 choices at the end: pay the balloon and own the car (the option to purchase), return it and walk away (within agreed mileage and condition limits), or trade it in. If the car is worth more than the balloon, you have positive equity to put toward your next deal. PCH has no ownership option — you return the car at the end, full stop.
Lower monthly payments can mask a much higher total you need to pay overall. On the same £20,000 car over a 4-year term:
| Finance type | Monthly | Term | Extra costs | Approx. total |
|---|---|---|---|---|
| PCH | £280 | 48 months | ~£1,500 initial rental | ~£15,000 |
| HP | £370 | 48 months | ~£200 transfer fee | ~£18,000 |
| Personal loan | £304 | 60 months | Interest included | ~£18,200 |
| Personal Contract Purchase | £290 | 48 months | ~£13,000 balloon | ~£27,000 |
PCP's balloon is the biggest single cost — and it arrives all at once. Underestimate your annual mileage by 3,000 miles on a 4-year PCP or PCH deal and you could face around £1,200 in excess charges at handback.
If you have limited or imperfect credit, HP and personal loans are generally the most accessible — HP in particular, because the car acts as security for the lender. PCP typically requires a stronger credit profile, especially for low or 0% APR offers. PCH can be harder to access with a thin credit file.
Specialist lenders and guarantor arrangements can open up HP and personal loan options that mainstream lenders might decline.
PCP and HP are the 2 most popular UK finance products. PCP costs less per month, roughly £80 less on a £20,000 car, because monthly payments cover only depreciation. But HP's total cost is lower overall: no balloon payment. HP transfers ownership automatically at the final payment; PCP only does so if you choose to pay the balloon.
HP suits you if you want to own the car and keep total interest low. PCP suits you if you want lower monthly payments and the option to swap cars at the end.
HP and PCP together account for the large majority of UK car finance agreements. PCP dominates new car sales, driven by its lower monthly payments and end-of-term flexibility. HP is more common in used car finance, where straightforward ownership tends to matter more than payment flexibility.
To pick your best-fit finance type, here's what you need to know: Do you want to own the car? How much can you spend each month? What does your credit history look like? And how long do you plan to keep the vehicle?
Hire Purchase (HP) is the cleaner path to ownership — no balloon payment, no mileage cap, no complex end-of-term decision. You pay a deposit, make fixed monthly instalments over 12 to 60 months, and the car is yours once the final payment clears. Monthly payments run higher than PCP or leasing, but you're building toward full ownership from day one.
A personal loan gives you something HP doesn't: immediate ownership. The car is yours from the moment you drive away — sell it, modify it, or rack up miles without asking anyone's permission. The trade-off is that you can't hand it back if your circumstances change.
Personal Contract Hire (PCH) typically delivers the lowest monthly payment, followed by PCP. With PCH, you're renting the car for a set period — road tax is usually included, and many agreements add breakdown cover. The restriction: annual mileage limits (commonly 5,000 to 30,000 miles) and a requirement to return the car in good condition. Exceed the mileage or return it damaged, and extra charges apply.
PCP sits between leasing and HP on monthly cost, but a large balloon payment waits at the end if you want to keep the car.
Bad credit doesn't rule you out. HP is often the most accessible product for buyers with imperfect credit because the loan is secured against the vehicle, reducing the lender's risk. Specialist lenders and bad-credit brokers work with applicants mainstream banks decline — expect APRs in the 15% to 25% range. If your credit history is very thin, a guarantor loan can open doors that would otherwise stay closed.
PCP and PCH both suit drivers who prefer a new set of wheels every 24–36 months over long-term ownership. At the end of a PCP agreement, you can hand the car back, pay the balloon to keep it, or use any positive equity as a deposit on your next deal. PCH is simpler — return the car and start a fresh lease. Neither suits high-mileage drivers well; if you regularly exceed 20,000 miles a year, HP or a personal loan will likely cost less overall.
Applying for car finance follows 4 clear steps. Check your credit file for errors first — a score of 600 or above puts you in a stronger position. Next, calculate what you can comfortably afford each month. Then gather your documents: proof of income (payslips or tax returns if self-employed), photo ID, and proof of address. Finally, compare lenders before submitting a formal application.
Lenders must legally run an affordability assessment, reviewing your income and outgoings to confirm repayments are sustainable.
You can apply through Carplus, which searches a range of lenders at once. You can usually get a soft credit check upfront. This shows your approval odds without marking your credit file.
Compare and find the best car finance deals quickly and easily even with bad or poor credit. When comparing deals, you can also factor in the part-exchange value of your current car to reduce the overall cost.
Getting a finance quote with Carplus won't affect your credit score, but a hard search will be completed before completion of the deal
No-deposit car finance options are also available. Check your eligibility today with a soft search and find out what you qualify for.
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Handing back your PCP car doesn't automatically mean you owe nothing. 3 types of charges can apply:
Most applicants are accepted. Industry data puts the refusal rate at around 7%, meaning roughly 93% of applications succeed. Your credit score is the main variable: a score of 620 or above gives you good odds across most products; 580–619 is workable with specialist lenders, though at higher APRs. Below 580, guarantor loans or bad-credit lenders are the realistic route.
Lenders also weigh income stability, your debt-to-income ratio, and employment status. Self-employed applicants aren't excluded — 2 years of accounts or tax returns usually satisfies the income check.
Set up a standing order so you make regular payments automatically, a missed payment on a secured product like Hire Purchase risks repossession and damages your credit file. On HP, paying above the minimum each month builds equity faster and reduces the cost of credit. On PCP or Personal Contract Hire, track your annual mileage: underestimating by 3,000 miles a year adds up to £300 or more in overage charges at the end. If money gets tight, contact your lender before you miss a payment: you may be able to secure payment holidays or restructuring, and early contact keeps your options open.
Yes, limited credit history shapes which products suit you. Guarantor finance lets a parent or trusted adult back your application; they're only liable if you default, and many mainstream lenders accept this arrangement. Specialist young-driver lenders focus specifically on thin credit files and can approve applications that standard lenders decline. APRs on these products typically run 15–20%, which is higher than standard rates, but each on-time payment builds your credit file. After 24–36 months of clean repayments, your score rises enough to qualify for mainstream rates on your next agreement.
