With hire purchase, the loan is secured against the car, meaning you won't own it until you've made all the payments and covered the 'Option to Purchase' fee. Typically, a deposit is required at the start of the agreement, which helps reduce the total amount borrowed and the monthly payments. One of the benefits of HP is that there are usually no mileage restrictions, allowing you to drive as much as you want without incurring extra charges. This type of finance is straightforward: after making the final payment, the car is yours.
A personal car loan is a straightforward way to finance a car. You typically receive the loan amount in one lump sum, allowing you to purchase the car outright. You then repay the loan in fixed monthly installments. While the monthly payments can be higher compared to HP and PCP, this option offers more flexibility. There are no mileage or usage restrictions, and you can sell the car at any time, even before the end of the loan term, if you wish. This type of loan is ideal for those who want full ownership of the car immediately and prefer not to have any contractual restrictions on how they use their vehicle.
Each car finance option offers different advantages, whether it's the straightforward ownership path of HP, the flexible end of term options of PCP or the unrestricted use provided by a personal car loan. It's important to consider your financial situation, driving habits and future plans when choosing the right type of car finance for you.
Personal Contract Purchase loans also involve securing the loan against the vehicle but they offer more flexibility at the end of the term. Instead of automatically owning the car, you have three options: return the car to the dealer, use any positive equity as a deposit for a new PCP deal or buy the car by making a final balloon payment. The monthly payments for PCP can be lower than those for HP because you're not paying off the entire value of the car over the loan term. However, you may have to agree to annual mileage limits, and exceeding these limits can incur additional fees. This option is popular for those who like to change their car frequently and want lower monthly payments.
Common Questions Answered
When you apply for a credit product such as car finance, the company will conduct a credit check before accepting you as a customer. Your credit history indicates how dependable you are in repaying loans or credit cards, and even your phone bill (if you’re on a contract) contributes to it.
A soft credit check happens when you review your own credit score or when a company checks it as part of a background check. This can include banks, lenders, retailers or landlords. While soft credit checks are noted on your report, they do not affect your credit rating.
Lenders use hard credit checks to examine your complete credit history when you apply for finance. Each time you apply for a loan, a hard credit check is performed. This type of credit search leaves a record on your credit history.
The good news is that self employed individuals now constitute nearly 16% of the UK workforce, making lenders more willing to approve self employed applicants. You might be asked for additional information about yourself, but this is simply to ensure lenders have a comprehensive understanding of your financial history before making a decision.
Lenders seek proof of stability in your employment and address history… the longer you’ve been at your current job and address, the better. They also review your credit score.
The short answer is yes! The key factor will be proving your income, along with the usual credit score checks. The lenders we contact on your behalf will want to ensure you can afford your monthly repayments, and they’ll do this by reviewing your credit score.
The good news is that you can terminate your contract early with most popular forms of car finance, but there are specific rules about when and how you can do it. If you can no longer afford the repayments, it’s crucial to contact your lender and inform them of your situation.
You must have already repaid 50% of the balance due, including interest and any other charges. If you have, you can cancel the contract and return the car. This is known as voluntary termination and is a legally binding initiative under the Consumer Credit Act 1974. If you haven’t yet paid off 50% of the amount owed but still want to cancel the contract, you can make additional payments to reach the halfway point. You won’t be able to terminate the contract until you do so.
It may seem surprising, but there are instances where you can get a new car without paying a deposit. The only exception might be a reservation fee of a few hundred pounds. Typically, you won’t need to make a payment for 30 days, until your first repayment is due.
A no deposit car finance deal can get you on the road quickly and allow you to spread the cost of a new vehicle evenly across the loan term. However, you’ll usually end up paying more each month. These loans often come with higher interest rates and overall costs.
We all know how quickly circumstances can change. A finance payment of a few hundred pounds a month or more can become a significant burden, even if it was affordable initially. If you have taken out a PCP or HP deal, the repayment period can sometimes extend up to 5 years, depending on the agreement.
In short, no, you cannot. The car legally remains the possession of the finance company until the end of the agreement, or unless you end the agreement early by paying off what you still owe.
If you are more than halfway through your repayments, you will not be able to return the car. To exit your car finance agreement, you would need to pay a settlement figure set by your lender.
Again, you are not allowed to sell the car while you still have outstanding debt. You are not the car’s legal owner until you have repaid the PCP agreement or the settlement figure in full.
The first option is to return the car if you have paid off half the finance agreement. If you haven’t, you will need to pay the difference to reach that point. Remember, you must have paid 50% of the total amount payable, which includes fees and interest, not just the amount borrowed.
The annual percentage rate (APR) is the official rate used to help you understand the cost of borrowing. It includes the interest rate and additional charges of a credit offer. All lenders must disclose their APR before you sign a credit agreement.
This refers to the lowest APR that a particular lender will offer to 51% of accepted applicants. For example, if you see an advert for a hire purchase loan with a 9% APR, it means that 51% of those accepted for the loan can get it at that rate or better. The remaining 49% are likely to be offered a higher APR.
With exact APR, what you see is what you get. When you apply for car finance, the APR you see is what you’ll receive when the loan is agreed. Exact APR is tailored to your personal finances and credit score.
While this rate can be higher than many representative APRs you might see advertised, it is more accurate. There are no hidden charges, so you’ll pay exactly what you expect to pay.
‘Real’ APR is the interest rate you actually have to pay, rather than the advertised representative rate. This is calculated by the lender based on how ‘risky’ they perceive you to be as a borrower. They determine this using various sources of information, including:
Bad credit occurs when you have a history of not paying bills or haven’t had enough time to build a substantial credit score.
Your credit score is determined by five main factors:
If you have a history of missed payments, accumulating debt and making multiple financial commitments you can’t afford, you will be considered higher risk and have a lower credit score. Being under 21 can also be a disadvantage, as you haven’t had enough time to build a strong credit score. All these factors make it less likely for lenders to approve you for finance.
You will need to have a few items ready when completing an application:
A poor credit history can significantly impact your ability to secure loans or financial services.
Individuals with lower credit scores are less likely to receive competitive rates and may even face loan refusals from some lenders. However, there are methods to obtain credit approval despite a poor credit score, and steps you can take to improve your score:
Starting with a credit report is beneficial as it provides a detailed overview of your credit history, including your overall score. It helps identify areas for improvement to enhance your chances of securing finance. You can obtain a free copy of your credit report from Experian or Equifax.
If you haven’t already, ensure you register on the electoral roll. Finance companies use this information during credit checks to verify your name and address. Being registered on the electoral roll facilitates these checks. While it won’t drastically improve your credit rating, it does help and is easy to do.
This might seem obvious, but consistently paying bills, such as a phone bill or credit card, is crucial. These small steps help build trust with lenders.
Submitting multiple applications results in more ‘Hard Searches’ on your credit score. If you have a low score and frequently face rejections, it can negatively impact your score. Initially, consider an eligibility check or ‘Soft Search’ instead of a formal application. While it won’t guarantee a loan offer, it provides a good indication and doesn’t appear on your credit history.