Let's start at the beginning. Car finance includes various different types of contracts which allow you to make monthly payments for a vehicle. (Not necessarily just cars - we can help with motorbikes, vans, caravans and more). It's secured on the vehicle, which means that the lender owns the vehicle (often they'll send the money straight to the dealership) and then you make payments to the lender. You don’t own the vehicle until all the payments due under the agreement have been paid in full.
Car finance works as a way of getting ownership when you don't have the cash to pay upfront, making it a convenient way to pay for a vehicle. Any finance plan should be based on your budget and credit profile, so you can get monthly payments which are affordable.
Hire Purchase is the most common type of finance, and you might have come across it before. It's really simple – you hire the vehicle and make monthly repayments until you've paid off the agreed finance. Once all the payments have been made the car becomes yours. You'll probably have to pay a small purchase fee or admin fee at the end of the agreement.
Personal Contract Purchase (PCP) is not as common as hire purchase but it's becoming more popular. It's really similar to hire purchase, but you have the option of whether you want to buy the car at the end of the loan or hand it back. If you want to buy it you pay a balloon payment. The value of the car is fixed (called the Guaranteed Future Value) at the start of the agreement, so you'll know what the balloon payment is from the start and can plan whether you want to pay it and buy the car.
Conditional Sale is another variation, but with this type of car finance you don't have to pay a fee at the end, just the monthly instalments. Essentially, you pay for the vehicle in instalments. It belongs to the lender while you're making the repayments, even though you have possession of it. Once you've completed all the monthly payments you become owner of the vehicle.
A large one off payment at the end of the finance agreement to buy the vehicle.
With all types of loan and credit agreements, there are some risks, but in the UK car finance is regulated by the Financial Conduct Authority and lenders must follow responsible lending practices. The finance is secured on the vehicle, so if you don't keep up with the monthly repayments the lender could repossess the car.
As with any type of finance, missing payments can damage your credit profile, but a responsible lender will look at your income and expenditure and make sure you can afford the repayments.
We try to be as clear as possible when we're talking about finance, but sometimes we have to use technical finance terms. To help make it even clearer, we've gathered them together in an easy to use dictionary.
Knowledge is power, so get definitions for all the finance terms and jargon that can be found on our site, in our contracts and around the web.Finance terms and jargon